The data for Pointe-Claire Inc. are given in P9-55B. Assume that the transfer price has been set at $504, which is division A's total cost plus a 20% markup. Division A's total cost of a component is $420, which includes fixed overhead applied at the rate of $200,000 of budgeted fixed overhead costs on budgeted annual production of 10,000 units. Division B has a special offer for its product of $550. Division B incurs variable costs of $100 in addition to the transfer price for the division A components. Both divisions currently have excess capacity.
Instruction:
(a) What is division B's manager likely to do regarding acceptance or rejection of the special offer? Why?
(b) Is this decision in the best interests of the company as a whole? Why?
(c) How could the situation be remedied using the transfer price?