Transfer-pricing methods, goal congruence
British Columbia Lumber has a Raw Lumber Division and a Finished Lumber Division. The variable costs are:
* Raw Lumber Division: $100 per 100 board-feet of raw lumber
* Finished lumber Division: $125 per 100 board-feet of finished lumber
Assume that there is no board-feet loss in processing raw lumber into finished lumber. Raw lumber can be sold at $200 per 100 board-feet. Finished lumber can be sold at $275 per 100 board-feet.
1. Should British Columbia Lumber process raw lumber into its finished form? Show you computations.
2. Assume that internal transfers are made at 110% of variable costs. Will each division maximize its division operating income contribution by adopting the action that is in the best interest of British Columbia Lumber? Explain.
3. Assume that internal transfers are made at market prices. Will each division maximize its division operating income contribution by adopting the action that is in the bet interest of British Columbia Lumber? Explain.