Stavos Company’s Cabinet Division manufactures a standard cabinet for television sets. The cost per cabinet is:

Part of the Cabinet Division’s output is sold to outside manufacturers of television sets and part is sold to Stavos Company’s Quark Division, which produces a TV set under its own name. The Cabinet Division charges $140 per cabinet for all sales.

The costs, revenue, and net operating income associated with the Quark Division’s TV set is given below:

The Quark Division has an order from an overseas source for 1,000 TV sets. The overseas source wants to pay only $340 per set.

Required:

1.         Assume that the Quark Division has enough idle capacity to fill the 1,000-set order. Is the division likely to accept the $340 price or to reject it? Explain.

2.         Assume that both the Cabinet Division and the Quark Division have idle capacity. Under these conditions, would it be advantageous for the company as a whole if the Quark Division rejects the $340 price? Show computations to support your answer.

3.         Assume that the Quark Division has idle capacity but that the Cabinet Division is operating at capacity and could sell all of its cabinets to outside manufacturers. Compute the profit impact to the Quark Division of accepting the 1,000-set order at the $340 unit price.

4.         What conclusions do you draw concerning the use of market price as a transfer price in intracompany transactions?

Transcribed Image Text:

Variable cost per cabinet Fixed cost per cabinet Total cost per cabinet $ 70 30* $100 *Based on a capacity of 10,000 cabinets per year.