Problem
Deep Sea Drilling Corp. has two divisions, Refining and Production. The company's primary product is Clean Oil. Each division's costs are provided below:
Refining: Variable costs per litre of oil $30
Fixed costs per litre of oil $24
Production: Variable costs per litre of oil $6
Fixed costs per litre of oil $4
The Production Division is able to sell the oil to other areas for $24 per litre. The Refining Division has been operating at a capacity of 80,000 litres a day, using oil from the Production Division and oil purchased from other suppliers. The Refining Division usually purchases 50,000 litres of oil, on average, from the Production Division and 30,000 litres, on average, from other suppliers at $40/litre.
Task
A. What is the transfer price per litre assuming the method used is 175% of variable costs?
B. What is the transfer price per litre from the Production Division to the Refining Division assuming the method is 120% of full costs?
C. What is the transfer price per litre from production to refining if the market price method of pricing is used?
D. What is the Production Division's operating income per 200 litres of oil reported under the 175% of variable costs method?
E. What is the Refining Division's operating income if 150 litres of oil are sold at $110 /litre and 200 litres are transferred in? Assume the transfer price is based on 175% of variable costs.