Individual-Assignment

ACCT6120ManagementControlSystemsIndividualAssignmentColumbiaLumberhasarawlumberdivisionandafinishedlumberdivision.Thevariablecostsareasfollows:Rawlumberdivision:$100per100board-feetofrawlumberFinishedlumberdivision:$125per100board-feetoffinishedlumberAssumethatthereisnoboard-feetlossinprocessingrawlumberintofinishedlumber.Rawlumbercanbesoldat$200per100board-feet.Finishedlumbercanbesoldat$275per100board-feet.AlsoassumethatRawlumberdivisionhasnoexcesscapacity,i.e.,iteithersellsrawlumberdirectlyorsellstoFinishedlumberdivisionforfurtherprocessing,butnotboth.1.ShouldColumbiaLumberprocessrawlumberintofinishedlumber?Showyourcalculations.2.Assumethatinternaltransfersaremadeat110%ofvariablecost.WilleachdivisionmaximizeitsdivisionoperatingincomecontributionbyadoptingtheactionthatisinthebestinterestofColumbiaLumberasawhole?Explain.3.Assumethatinternaltransfersaremadeatmarketprices.WilleachdivisionmaximizeitsdivisionoperatingincomecontributionbyadoptingtheactionthatisinthebestinterestofColumbiaLumberasawhole?Explain.1.Alternative1:ColumbiaLumbersellrawlumberdirectly:Contributionmargin=Revenue-Variablecost=$200-$100=$100Alternative2:ColumbiaLumberprocessrawlumberintofinishedlumber:Contributionmargin=Revenue-Variablecost=$275-$100-$125=$50Aswecansee,ColumbiaLumbercangeneratemorecontributionmarginbysellingrawlumberdirectly.Thus,ColumbiaLumbershouldn’tprocessrawlumberintofinishedlumber.2.Alternative1:ColumbiaLumbersellrawlumberdirectlyContributionmarginofRawLumberDivision=RevenueofRawLumberDivision-VariablecostofRawLumberDivision=$200-$100=$100ContributionmarginofFinishedLumberDivisionis0Contributionmarginofwholecompany=Revenue-Variablecost=$200-$100=$100Alternative2:ColumbiaLumberprocessrawlumberintofinishedlumber:ContributionmarginofRawLumberDivision=RevenueofRawLumberDivision-VariablecostofRawLumberDivision=$110($100*110%)-$100=$10ContributionmarginofFinishedLumberDivision=RevenueofFinishedLumberDivision-VariablecostofFinishedLumberDivision=$275-$110($100*110%)-$125=$40Contributionmarginofwholecompany=Revenue-Variablecost=$275-$100-$125=$50Aswecansee,alternative1isinthebestinterestofColumbiaLumberasawholesinceColumbiaLumbercangeneratemorecontributionmarginunderthisalternative.Andalsotherawlumberdivisionmaximizeitsdivisionoperatingincomecontributionbyadoptingalternative1thatthedivisioncanselltherawlumberatahighermarketprice.However,thefinishedlumberdivisiondon’tearnanoperatingincomesincethereisnoneedtoprocessrawlumberintofinishedlumber.Itwouldwanttoadoptalternative2.Sothereiscontroversybetweenthewholecompanyandthedivision.3.Alternative1:ColumbiaLumbersellrawlumberdirectlyContributionmarginofRawLumberDivision=RevenueofRawLumberDivision-VariablecostofRawLumberDivision=$200-$100=$100ContributionmarginofFinishedLumberDivisionis0Contributionmarginofwholecompany=Revenue-Variablecost=$200-$100=$100Alternative2:ColumbiaLumberprocessrawlumberintofinishedlumber:ContributionmarginofRawLumberDivision=RevenueofRawLumberDivision-VariablecostofRawLumberDivision=$200-$100=$100ContributionmarginofFinishedLumberDivision=RevenueofFinishedLumberDivision-VariablecostofFinishedLumberDivision=$275-$200-$125=-$50Contributionmarginofwholecompany=Revenue-Variablecost=$275-$100-$125=$50Aswecansee,alternative1isinthebestinterestofColumbiaLumberasawholesinceColumbiaLumbercangeneratemorecontributionmarginunderthisalternative.Andtherawlumberdivisioncanmaximizeitsdivisionoperatingincomecontributionadoptingwhetheralternative1oralternative2sinceitgeneratedthesamecontributionmarginof$100.Alsothefinishedlumberdivisioncanavoida$50lossunderalternative1.Sobothdivisionsmaximizetheiroperatingincomecontributionbyadoptingalternative1.