Wattle Limited has two divisions: Industry and Consumer. The Industry Division transfers partially completed components to the Consumer Division at a predetermined transfer price. The Industry Division's standard variable production cost per unit is $500. This division could sell all its components to outside buyers at $650 per unit in a perfectly competitive market. The Consumer Division has a special offer of $740 for its product. The Consumer Division incurs variable costs of $260 in addition to the transfer price for the Industry Division's components. Both Industry and Consumer divisions currently have spare production capacity.

Required:

a) Determine a transfer price using the general transfer pricing rule.

b) Assume that the transfer price has been set at $530, is the Consumer Division manager likely to want to accept or reject the special offer? Why?

c) Is the decision in the best interests of Wattle Limited as a whole?

Answer rating: 100% (QA)

a The general transfer pricing rule aims to set the transfer price at the opportunity cost to the selling division which is the price at which the div... View the full answer