What is the transfer price per barrel from the Extraction Division to the Refining Division, assuming the method used to place a value on each barrel of oil is 115% of full costs?
The transfer price per barrel from the Extraction Division to the Refining Division, using the 115% oil cost valuation method, is calculated based on the full costs incurred by the Extraction Division. The full cost per barrel is the sum of variable and fixed costs per barrel, which are $17 and $12 respectively. Therefore, the full cost per barrel from the Extraction Division is $29 ($17 + $12).
Since the transfer price is determined at 115% of full costs, we multiply the full cost per barrel by 1.15 to obtain the transfer price per barrel. Hence, the transfer price per barrel from the Extraction Division to the Refining Division is $33.35 ($29 * 1.15).
This transfer price ensures that the Refining Division pays a fair amount for the oil received from the Extraction Division, taking into account both variable and fixed costs. By utilizing the full-cost approach and adding a 15% markup, the transfer price covers the expenses incurred by the Extraction Division while allowing for cost recovery and generating some profit for the supplying division.
Calculation of Transfer Price:
The transfer price per barrel is determined by considering the full cost per barrel from the Extraction Division and applying a markup of 15% to establish a fair price for the oil received by the Refining Division.
Full Cost Calculation:
Variable costs per barrel of oil from the Extraction Division: $17
Fixed costs per barrel of oil from the Extraction Division: $12
Full cost per barrel = Variable costs + Fixed costs
Full cost per barrel = $17 + $12
Full cost per barrel = $29
Transfer Price Calculation:
Transfer price per barrel = Full cost per barrel * 115%
Transfer price per barrel = $29 * 1.15
Transfer price per barrel = $33.35
By utilizing the 115% of full costs method to calculate the transfer price, the company ensures that the Refining Division pays a reasonable amount for the oil and allows for the recovery of costs while still generating some profit for the Extraction Division. This approach considers both variable and fixed costs incurred by the supplying division and safeguards against underpricing or loss of revenue.
In conclusion, the transfer price per barrel from the Extraction Division to the Refining Division is $33.35 when calculated using the 115% oil cost valuation method. This pricing strategy promotes fairness in inter-divisional transactions and supports the financial sustainability of both divisions within Axelia Corporation.