(SOLVED) Ilmajoki Lumber Oy has a Raw Lumber Division and Finished Lumber


Question Description:

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Ilmajoki-Lumber Oy has a Raw Lumber Division and Finished Lumber Division. The variable costs are:
• Raw Lumber Division: €100 per 100 board-metres of raw lumber.
• Finished Lumber Division: €125 per 100 board-metres of finished lumber.
Assume that there is no waste incurred in processing raw lumber into finished lumber. Raw lumber can be sold at €200 per 100 board-metres. Finished lumber can be sold at €275 per 100 board-metres.
Required
1. Should Ilmajoki-Lumber process raw lumber into its finished form?
2. Assume that internal transfers are made at 110% of variable costs. Will each division
maximise its contribution to divisional operating profit by adopting the action that is in the best interests of Ilmajoki-Lumber?
3. Assume that internal transfers are made at market prices. Will each division maximise its contribution to divisional operating profit by adopting the action that is in the best interests of Ilmajoki-Lumber?

Answer

$19