Question

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.

Required:
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?



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  • CreatedApril 22, 2014
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