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

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.