Question

the following information is retrieved from Penn oil corporation for two divisions ( blending and distribution) out of its eight manufacturing divisions; the company's primary product is Luboil Oil. Each division's costs are provided below:

Blending division:

purchase of 50,000 barrels as crude oil from the secondary Treating division by $35 per barrel. In addition, Blending division paid the following internal cost:

direct material variable costs per barrel of oil $6

total fixed costs $100,000

Assume that the blending division transfer 40,000 barrel to Distribution division and the transfer price per parrel is computing by one of the following methods:

-market price of $69.1

-internal price of 180% of total variable cost

- hybrid price of $70

Distribution didision:

distribution division paid the following internal cost:

direct material variable costs per barrel of oil $10

total fixed costs $120,000

The distribution division sold 35,000 barrel to external customer by$100 per barrel

Required:

1- what is the net operating income for each division using the three transfer price methods?

2-what is the net income for both division using the three transfer price methods?

Answer 1

	Blending Division
	Method 1	Method 2	Method 3
Transfer Price	2,764,000.00	2,952,000.00	2,800,000.00
Cost of Goods Sold
Crude Oil	1,400,000.00	1,400,000.00	1,400,000.00
Direct Material	240,000.00	240,000.00	240,000.00
Contribution	1,124,000.00	1,312,000.00	1,160,000.00
Fixed Costs	100,000.00	100,000.00	100,000.00
Operating income	1,024,000.00	1,212,000.00	1,060,000.00

	Distribution division
	Method 1	Method 2	Method 3
Sales	3,500,000.00	3,500,000.00	3,500,000.00
Cost of Goods Sold
Crude Oil	2,764,000.00	2,952,000.00	2,800,000.00
Direct Material	350,000.00	350,000.00	350,000.00
Contribution	386,000.00	198,000.00	350,000.00
Fixed Costs	120,000.00	120,000.00	120,000.00
Operating income	266,000.00	78,000.00	230,000.00

2. Net Income of Each Division will be same as Operating Income because of no other indirect expenses are given in the question.

However, the Net Operating Income of both the division together is calculated in below table:

Sales	3,500,000.00
Cost of Goods Sold
Crude Oil	1,225,000.00
Direct Material	590,000.00
Contribution	1,685,000.00
Fixed Costs	220,000.00
Net Income	1,465,000.00

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