The River Falls Company has two divisions. The Cutting Division prepares timber at its sawmills. The Coating Division prepares the cut lumber into finished wood for the furniture industry. No inventories exist in either division at the beginning of 20X5. During the year, the Cutting Division prepared 60,000 cords of wood at a cost of $720,000. All the lumber was transferred to the Coating Division, where additional operating costs of $5 per cord were incurred. The 600,000 boardfeet of finished wood were sold for $2,500,000. Required:
a. Determine the operating income for each division if the transfer price from Cutting to Assembly is at cost - $11 a cord.
b. Determine the operating income for each division if the transfer price is $9 per cord.
c. Since the Cutting Division sells all of its wood internally to the Assembly Division, does the manager care what price is selected? Why? Should the Cutting Division be a cost center or a profit center under the circumstances?

a) Operating income at the cost of $11 is $660,000

b) Operating income at the cost of $9 is $540,000

c) Yes, the manager care what price is selected. The Cutting Division be a cost center.  

Explanation:

a)                                              Cutting                          Assembly

Revenue                              $660,000                       $2,500,000

Cost of services

Incurred                               $660,000                        $360,000

Transferred-in                           $0                              $660,000

Total                                    $660,000                        $1,020,000

Operating income                    $0                              $1,480,000

Operating income at the cost of $11 = 60,000 cords × $11 = $660,000

b)                                            Cutting                            Assembly

Revenue                               $540,000                       $2,500,000

Cost of services

Incurred                               $660000                        $360,000

Transferred-in                           $0                              $540,000

Total                                    $660000                        $900,000

Operating income              ($120,000)                       $1,600,000

Operating income at the cost of $9 = 60,000 cords × $9 = $540,000