Your company produces cookies in a two-step process. The Mixing Division prepares the cookie dough and transfers it to the Baking Division, which bakes the cookies and packs all finished cookies for shipment.
At a recent meeting of your company’s board of directors, the manager of the Baking Department made this statement: “That Mixing Division is robbing us blind!” Because of the board’s concern about this statement, the company controller gathered the following data for the past year:
Mixing Division Baking Division
| Sales Regular | $700,000 | $1,720,000 | ||
| Deluxe | 900,000 | 3,300,000 | ||
| Direct Materials | ||||
| Cookie Dough (from Mixing | Division | -----·-- | 1,600,000 | |
| Cookie ingredients Box inserts | 360,000 ------- | ------- 660,000 | ||
| Boxes | ------- | 1,560,000 | ||
| Direct labor | 480,000 | 540,000 | ||
| Variable overhead | 90,000 | 240,000 |
| Fixed divisional overhead -avoidable | 150,000 | 2 10,000 |
| Selling and general operating expenses | 132,000 | 372,000 |
| Company administrative expenses | 84,000 | 108,000 |
During the year, the two divisions completed and transferred or shipped 200,000 regular cookie boxes and 150,000 deluxe cookie boxes.
Transfer prices used by the Mixing Division were as follows:
Regular ................$3.50
Deluxe ...................6.00
The regular box wholesales for $8.60 and the deluxe box for $22.00. The company uses a predetermined formula to allocate administrative costs to the divisions. Management has indicated that the transfer price should include a 20 percent profit factor on total division costs.
Instructions:
1- Prepare a performance report on the Mixing Division
2- Prepare a performance report on the Baking Division
3- Compute each division’s rate of return on controllable costs and on total division costs.
4- Do you agree with the statement made by the manager of the Baking Division? Explain your response.
5- What procedures would you recommend to the board of directors?
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