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Explain why transfer prices based on total actual costs are not appropriate as the basis for divisional performance measurement.
1. Explain why transfer prices based on total actual costs are not appropriate as the basis for divisional performance measurement. 2. Using the market price as the transfer price, determine the contribution margins for both the Mining division and the Metals division. 3. If Redstone Industrial Resources Company were to institute the use of negotiated transfer prices and allow division to buy and sell on the open market, determine the price range for toldine that would be acceptable to both the Mining Division and the Metals Division. 4. Use the general transfer pricing rule to compute the lowest transfer price that would be acceptable to the Mining Division. Is your answer consistent with your conclusion in #3?5. Identify which one of the three types of transfer prices (cost-based, market-based, or negotiated) in most likely to elicit desirable management behavior at RIRC. SEE ATTACHMENT13-48Redstone Industrial Resources Company (RIRC) has several divisions.However, only two divisions transfer products to other divisions. TheMining Division refines toldine, which is then transferred to MetalsDivision. The toldine is processed into an alloy by the Metals Division,and the alloy is sold to the customers at a price of $450 per unit. TheMining Division is currently required by RIRC to transfer its totalyearly output of 400,000 units of toldine to the Metals Division attotal actual manufacturing cost plus 10%. Unlimited quantities oftoldine can be purchased and sold on the open market at $270 per unit.While the Mining Division could sell al the toldine it produces at $270per unit on the open market, w would incur a variable selling cost of$15 per unit.Brian Jones, manager of the Mining Division, is unhappy with having totransfer the entire output of toldine to the Metals Division at 110percent of cost. In a meeting with the management of RIRC, he saidâWhy should my division be required to sell toldine to the MetalsDivision at less than market price? For the year just ended in May,Metalâs contribution margin was over $57 million on sales of 400,000units, while Miningâs contribution was just over $15 million on thetransfer of the same number of units. My division is subsidizing theprofitability of the Metals Division. We should be allowed to charge themarket price for toldine when transferring to the Metals Division.âThe following table shows the detailed unit cost structure unit coststructure for both the Mining and Metals divisions during the mostrecent year.
