Problem 11-23 (Algo) Market-Based Transfer Price [LO11-3]

Stavos Companys Screen Division manufactures a standard screen for high-definition televisions (HDTVs). The cost per screen is:

Variable cost per screen	$ 125
Fixed cost per screen	26*
Total cost per screen	$ 151

*Based on a capacity of 770,000 screens per year.

Part of the Screen Divisions output is sold to outside manufacturers of HDTVs and part is sold to Stavos Companys Quark Division, which produces an HDTV under its own name. The Screen Division charges $191 per screen for all sales.

The net operating income associated with the Quark Divisions HDTV is computed as follows:

Selling price per unit		$ 582
Variable cost per unit:
Cost of the screen	$ 191
Variable cost of electronic parts	238
Total variable cost		429
Contribution margin		153
Fixed costs per unit		81*
Net operating income per unit		$ 72

*Based on a capacity of 170,000 units per year.

The Quark Division has an order from an overseas source for 5,100 HDTVs. The overseas source wants to pay only $406 per unit.

Required:

1. Assume the Quark Division has enough idle capacity to fill the 5,100-unit order. Is the division likely to accept the $406 price or to reject it?

2. Assume both the Screen Division and the Quark Division have idle capacity. Under these conditions, what is the financial advantage (disadvantage) for the company as a whole (on a per unit basis) if the Quark Division rejects the $406 price?

3. Assume the Quark Division has idle capacity but that the Screen Division is operating at capacity and could sell all of its screens to outside manufacturers. Under these conditions, what is the financial advantage (disadvantage) for the company as a whole (on a per unit basis) if the Quark Division accepts the $406 unit price?