## Answers

1) Alt. 1: Selling as raw lumber for $175 @100 board feet

Alt. 2: Selling as finished lumber for $345 @100 board feet

Alternative 1: | |

Revenue | 175 |

VC | 125 |

CM | $50 per 100 board feet |

Alternative 2: | |

Revenue | 345 |

VC: | |

Raw lumber | 125 |

Finished lumber | 145 |

CM | $75 per 100 board feet |

Calgary Lumber will maximize its CM with processing raw lumber into finished lumber i.e. Alternative 2

2)

Raw Lumber | Finished Lumber | |

Raw Lumber Division | ||

Division revenues | 175 | 162.5 |

Division variable costs | 125 | 125 |

Division operating income | 50 | 37.5 |

Finished Lumber Division | ||

Division revenues | 345 | |

Transferred-in costs | 162.5 | |

Division variable costs | 145 | |

Division operating income | 37.5 |

From above calculations we can conclude that the Raw Lumber Division maximizes reported division operating income with the selling raw lumber, although it is not the action preferred by the firm as a whole. The Finished Lumber Division maximizes operating income of division with the processing raw lumber further, which coincides with the action preferred by the firm as a whole

3)

Raw Lumber | Finished Lumber | |

Raw Lumber Division | ||

Division revenues | 175 | 175 |

Division variable costs | 125 | 125 |

Division operating income | 50 | 50 |

Finished Lumber Division | ||

Division revenues | 0 | 345 |

Transferred-in costs | 175 | |

Division variable costs | 145 | |

Division operating income | 0 | 25 |

Because the Raw Lumber Division would be indifferent among selling the lumber in raw form or finished form, thus the company will be willing to have the raw lumber processed further, as this is the action preferred as a whole by the company.

The calculations reveal that the Finished Lumber Division would maximize division operating income with further processing of raw lumber and it is also preferred by the company as a whole. Therefore, transferring it at market price will lead in division actions which are also in the company's best interest as a whole

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