Question

Shaw is a lumber company that also manufactures custom cabinetry. It is made up of two divisions: Lumber and Cabinetry. The Lumber Division is responsible for harvesting and preparing lumber for use; the Cabinetry Division produces custom-ordered cabinetry. The lumber produced by the Lumber Division has a variable cost of $3.80 per linear foot and full cost of $4.80. Comparable quality wood sells on the open market for $11.40 per linear foot.

Required:

1. Assume you are the manager of the Cabinetry Division. Determine the maximum amount you would pay for lumber.

2. Assume you are the manager of the Lumber Division. Determine the minimum amount you would charge for the lumber if you have excess capacity. Repeat assuming you have no excess capacity.

3. Assume you are the president of Shaw. Determine a mutually beneficial transfer price assuming there is excess capacity.

Answer 1

Req 1	Maximum Price	11.4	(Because as a manager of Cabinet division I would not pay the amount higher that the market offering price which is offered by lumber division to other customer)
Req 2	Minimum Amount	3.8	(Because as manager of lumber division , I would like to charge minimum relevant cost i.e. variable cost incurred to produce each item)
Req 3	Mutually Beneficial Transfer Price	7.6	(As a president of shaw I would want that both the division earn eaqual benefit under this transfer)
	Average of both the price =(11.4 + 3.8 )/2