$4$:$02$

Safari

E$12\mathrm{.}30$ Cost$-$based transfer pricing: manufacturer

LO$12\mathrm{.}12$ Refer to Exercise E$12\mathrm{.}29.$ The assembly division's absorption cost of a component is $$510,$ which includes $12\mathrm{.}13$ $$60$ of applied fixed overhead costs. The transfer price has been set at $$561,$ which is the assembly division's absorption cost plus a $10$ per cent markup.

The electrical division has a special offer of $$697\mathrm{.}50$ for its product. The electrical division incurs variable costs of $$150$ in addition to the transfer price for the assembly division's components. Both divisions currently have spare production capacity.

Required:

Is the electrical division manager likely to want to accept or reject the special offer? Why?

Is this decision in the best interests of Electro Ltd as a whole? Explain.

How could the situation be remedied using the transfer price?