Refer to the preceding exercise. The Fabrication Division’s full (absorption) cost of a component is $340, which includes $40 of applied fixed-overhead costs. The transfer price has been set at $374, which is the Fabrication Division’s full cost plus a 10 percent markup.
The Assembly Division has a special offer for its product of $465. The Assembly Division incurs variable costs of $100 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?