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