The Assembly Division’s absorption cost of a component is $0, includes $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 $697.50 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.
1. Is the Electrical Division manager likely to want to accept or reject the special offer? Why?
2. Is this decision in the best interests of Electro Ltd as a whole? Explain.
3. How could the situation be remedied using the transfer price?