Payne Ltd. has two divisions. The Compound Division makes QZ54, an industrial compound, which is then transferred

$18*In the Compound Division the variable overhead is 80% of the total, and in Processing variable overhead represents 65% of the total. Fixed overhead rates are based on capacity of 800,000 kg. in each division. In addition to the manufacturing costs, the Compound Division would incur $2 per kilogram of selling costs which would be avoided on internal transfers. Similarly, the Processing Division would avoid $3/kg. of ordering costs on internal purchases.

Required:

a. Calculate the operating incomes for each division assuming 800,000 kg. of QZ54 are transferred and the company uses a market transfer price.

b. Calculate the operating incomes for each division assuming 800,000 kg. of QZ54 are transferred and the company uses a transfer pricing policy based on 125% of absorption manufacturing cost.

c. Comment on your calculations in a and b in terms of the respective division managers preferences.

d. Should the company transfer its 800,000 kg.  assuming the Compound Division can sell all of its output on the external market?

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