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.

Required:

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?



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