Reference no: EM133025184

Problem - Oriole Industries is a decentralized company with two divisions: mining and processing. They are both evaluated as profit centres. The mining division transfers raw diamonds to the processing division. The processing division is currently operating at 1 million kg below its capacity, while the mining division is operating at full capacity. The mining division can sell raw diamonds externally at $82 per kilogram. The unit cost of 1 kg of polished diamonds produced by the processing division is as follows:

Raw diamonds $82

Direct materials 13

Direct labour ($20/hour) 33

Variable manufacturing overhead 23

Fixed manufacturing overhead* 52

Total unit cost $203

*Based on a capacity of 5.20 million kg per year.

The processing division has just received an order from International Diamonds Co. for 310,000 kg of polished diamonds at a price of $190 per kilogram. Oriole has a policy that prohibits selling any product below total cost. The total cost of a kilogram of raw diamonds in the mining division is $65, of which 25% is company fixed costs.

If the mining division was not operating at full capacity, calculate the appropriate transfer price.