Refer to the preceding exercise. The Fabrication Division’s full (absorption) cost of a component is $510, which includes $60 of applied fixed-overhead costs. The transfer price has been set at $561, which is the Fabrication Division’s full cost plus a 10 percent markup.
The Assembly Division has a special offer for its product of $700. The Assembly Division incurs variable costs of $150 in addition to the transfer price for the Fabrication Division’s components. Both divisions currently have excess production capacity.

1. What is the Assembly Division’s manager likely to do regarding acceptance or rejection of the special offer? Why?
2. Is this decision in the best interests of the company as a whole? Why?
3. How could the situation be remedied using the transfer price?

  • CreatedApril 22, 2014
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