Suppose that Peggy O’Brien, as the controller of Padre Papers, decides to use a dual transfer pricing policy. Wood Division will sell wood to Paper Division for $50, and Paper Division will buy wood from Wood Division for $20. Paper can sell its product for $120 per unit, and all other data are unchanged from Exhibit 15.1. What is income for each of the divisions and for Padre Papers under this transfer pricing policy?
Exhibit 15.1 Cost and Production Data—Padre Papers
|
|
A |
B |
C |
|
1 |
|
Wood |
Paper |
|
2 |
Average units produced |
100,000 |
|
|
3 |
Average units sold |
|
100,000 |
|
4 |
Variable manufacturing cost per unit |
$ 20 |
|
|
5 |
Variable finishing cost per unit |
|
$ 30 |
|
6 |
Fixed divisional costs (unavoidable) |
$ 2,000,000 |
$ 4,000,000 |
|
7 |
|
|
|