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Transfer price

Dakoil Corporation has two divisions, Refining and Production. The company's primary product is Enkoil Oil. Each division's costs are provided below:

Production: Variable costs per barrel of oil $ 3

Fixed costs per barrel of oil $ 2

Refining: Variable costs per barrel of oil $10

Fixed costs per barrel of oil $12

The Refining Division has been operating at a capacity of 40,000 barrels a day and usually purchases 25,000 barrels of oil from the Production Division and 15,000 barrels from other suppliers at $20 per barrel. What is the transfer price per barrel from the Production Division to the Refining Division, assuming the method used to place a value on each barrel of oil is 110% of full costs?

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Cost based transfer ...

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Solution contains calculations of transfer price.