Sandra's Sheet Metal Company has two divisions. The Raw Material Division prepares sheet metal at its warehouse facility. The Finishing Division prepares the cut sheet metal into finished products for the air conditioning industry. No inventories exist in either division at the beginning of 20X8. During the year, the Raw Material Division prepared 450,000 square feet of sheet metal at a cost of $1,800,000. All the sheet metal was transferred to the Finishing Division, where additional operating costs of $1.50 per square foot were incurred. The 450,000 square feet of finished fabricated sheet metal products were sold for $3,875,000.
Required:
a. Determine the operating income for each division if the transfer price from Raw Material to Finishing is at a cost of $4 per square foot.
b. Determine the operating income for each division if the transfer price is $6 per square foot.
c. Since the Raw Materials Division sells all of its sheet metal internally to the Finishing Division, does the Raw Materials manager care what price is selected? Why? Should the Raw Materials Division be a cost center or a profit center under the circumstances?
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