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?
Please see the response to your posting as below:
Cost based transfer ...
Solution contains calculations of transfer price.