What is the transfer price per barrel from the Extraction Division to the Refining Division?

How is the transfer price per barrel from the Extraction Division to the Refining Division calculated? The transfer price per barrel from the Extraction Division to the Refining Division, assuming the method used to place a value on each barrel of oil is 180% of variable costs, is $25.20.

Calculation of Transfer Price

Variable costs of Extraction Division per barrel: $14

The transfer price per barrel is calculated as follows:

Transfer price = 180% of variable costs of Extraction Division

Transfer price = 180% * $14

Transfer price = 1.8 * $14

Transfer price = $25.20

Explanation

When determining the transfer price per barrel from the Extraction Division to the Refining Division, the method used is to place a value on each barrel of oil at 180% of the variable costs. This means that the transfer price is set at 180% of the variable costs of the Extraction Division, which in this case is $14.

By multiplying the variable costs by 180%, we get the transfer price of $25.20 per barrel. This ensures that the Refining Division pays a fair price for the oil it purchases from the Extraction Division, taking into account the actual costs incurred in the production process.

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