Question

Gattor Golf Buggies Ltd. has two divisions. The Chassis Division prepares the sub-frame for the golf buggies at its factory. The Assembly Division prepares the sub-frame into the finished fully-functional golf buggy for sale to the customer. No inventories exist in either Division at the beginning of 2019. During the year 2019, the Chassis Division manufactured 600 sub-frames at a cost of $720,000. All the sub-frames were transferred to the Assembly Division, where additional operating costs of $500 per sub-frame were incurred. The 600 golf buggies were sold for $2,500,000.

Required:

Assume that there is an internal transfer of all sub-frames produced by the Chassis Division to the Assembly Division. Explain whether the transfer price selected for this transfer of sub-frames matters to the manager of the Chassis Division. In your answer, explain why? Furthermore, explain whether the Chassis Division should be setup as a cost center or a profit center given the circumstances?

Answer 1