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.
W. Bentz
A&MIS 525
1
Ajax Cost Information
Mining Metals
Mfg. Cost
Division Division
Direct materials
$ 12
$ 6
Direct labor
16
20
Indirct costa
32
25
Total unit cost
$ 60
$ 51
aMining,
W. Bentz
25% fixed; Metals, 60% fixed
A&MIS 525
2
Ajax Company
[Capacity: 400,000 units]
Toldine
TP = $66
Metals Division
Price = $90
Processed
Toldine
External Customers
Toldine
Mining Division
Price = $150
W. Bentz
A&MIS 525
3
Ajax - Requirements 1 & 2
• See the worksheet C:/My
Documents/Topics/Managerial/Control
/Divisions/Problems/Hfd/H11C22P20.
xls
W. Bentz
A&MIS 525
4
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.
W. Bentz
A&MIS 525
5
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.
W. Bentz
A&MIS 525
6
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.
W. Bentz
A&MIS 525
7
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.
W. Bentz
A&MIS 525
8