The Derwent Omega-3 Oil Company Has Two Divisions

Essay

The Derwent Omega-3 Oil Company has two divisions.The Fish-oil Division extracts Omega-3 oil from its salmon fishery activities.The Finishing Division converts the oil into natural health products.No inventories exist in either division at the beginning of 2017.During the year,the Fish-oil Division extracted 30 000 litres of oil at a cost of $330 000.All the oil was transferred to the Finishing Division,where additional operating costs of $6 per litre were incurred.The 300 000 litres of finished product were sold for $1 250 000.
Required:
a.Determine the operating profit for each division if the transfer price from Fish-oil to Finishing is at cost - $11 a litre.
b.Determine the operating profit for each division if the transfer price is $9 per litre.
c.Since the Fish-oil Division sells all of its oil internally to the Finishing Division,does the manager care what price is selected? Why? Should the Fish-oil Division be a cost centre or a profit centre under the circumstances?
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