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Horizons petroleum has two divisions each a profit center. Transport Division purchases crude oil in Mexico@ $72 a barrel and transports it and sells it to the Refining Division in Houston. The pipeline has the capacity to transport 40,000 barrels of crude oil per day. The Refining Division processes the crude into gasoline and sells it to the market @ $190. 2 barrels of crude oil produce 1 barrel of gasoline. The Refining Division has been operating at capacity of 30,000 barrels of crude per day - consisting of 10,000 barrels from the Transport Division and 20,000 barrels from another producer who delivers it at $85 per barrel. All sold. The variable costs for each division are driven solely by the barrels of crude oil transported and barrels of gasoline produced, respectively. These are $1 for the Transportation and $8 for the Refining Divisions. The fixed costs per unit is based on the budgeted annual fixed costs and the practical capacity of crude oil that can be transported by the Transport Division and the gasoline that can be produced by the refining Division. These are 3 for the Transportation and $6 for the Refining Divisions. The three transfer prices are: 1. Market price $85 2. 105% of full cost 3. Hybrid price $82 Horizons petroleum has two divisions each a profit center. Transport Division purchases crude oil in Mexico@ $72 a barrel and transports it and sells it to the Refining Division in Houston. The pipeline has the capacity to transport 40,000 barrels of crude oil per day. The Refining Division processes the crude into gasoline and sells it to the market @ $190. 2 barrels of crude oil produce 1 barrel of gasoline. The Refining Division has been operating at capacity of 30,000 barrels of crude per day - consisting of 10,000 barrels from the Transport Division and 20,000 barrels from another producer who delivers it at $85 per barrel. All sold. The variable costs for each division are driven solely by the barrels of crude oil transported and barrels of gasoline produced, respectively. These are $1 for the Transportation and $8 for the Refining Divisions. The fixed costs per unit is based on the budgeted annual fixed costs and the practical capacity of crude oil that can be transported by the Transport Division and the gasoline that can be produced by the refining Division. These are 3 for the Transportation and $6 for the Refining Divisions. The three transfer prices are: 1. Market price $85 2. 105% of full cost 3. Hybrid price $82

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