1. W. BentzA&MIS 5251 HFD 22-20  The Mining Division of Ajax Corporation makes toldine, all of which is sent to the Metals Division for further processing. Toldine has a market price of $90 unprocessed and $150 fully processed. Ajax requires that the Mining Division’s sell all of its output of 400,000 units to the Metals Division.

2. W. BentzA&MIS 5252 Ajax Cost Information Mining Metals Mfg. CostDivisionDivision Direct materials$ 12$ 6 Direct labor1620 Indirct cost a 32 25 Total unit cost$ 60$ 51 a Mining, 25% fixed; Metals, 60% fixed

3. W. BentzA&MIS 5253 Ajax Company Mining Division [Capacity: 400,000 units] Metals Division Processed Toldine Toldine External Customers Toldine TP = $66 Price = $90 Price = $150

4. W. BentzA&MIS 5254 Ajax - Requirements 1 & 2 See the worksheet C:/My Documents/Topics/Managerial/Contro l/Divisions/Problems/Hfd/H11C22P20. xlsC:/My Documents/Topics/Managerial/Contro l/Divisions/Problems/Hfd/H11C22P20. xls

5. W. BentzA&MIS 5255 HFD 22-20 - Requirement 3 Brian’s arguments: 1.Setting transfer prices at 110% of cost provides the wrong incentives to the Mining Division. Increasing, not decreasing, the cost of mining would increase Brian’s bonus.

6. W. BentzA&MIS 5256 Brian’s arguments 2.Competitive market prices provide an objective measure of economic value added at each stage in the value chain, and the “market test” must be met in the final analysis.

7. W. BentzA&MIS 5257 Brian’s arguments 3. From a decision point of view, the market price of unprocessed toldine is meaningful, not the average mining cost plus an arbitrary markup.

8. W. BentzA&MIS 5258 Brian’s arguments 4.Without the option to sell to outside customers, the Mining Division is really an administered cost center, not a division with decentralized decision-making authority.