Reconsider Macron’s fabric division and sportswear division described on p. 433. In addition to the data there, suppose the fabric division has annual fixed manufacturing costs of €800,000 and expected annual production of enough fabric to make 100,000 golf shirts. The ‘fully allocated cost’ of the material for one golf shirt is as follows:

Assume that the fabric division has idle capacity. The sportswear division is considering whether to buy enough fabric for 10,000 golf shirts. It will sell each shirt for €25. The additional processing and selling costs in the sportswear division to produce and sell one shirt are €12. If Macron bases its transfer prices on fully-allocated cost, would the sportswear division manager buy? Explain. Would the company as a whole benefit if the sportswear division manager decided to buy? Explain.

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Variable costs Fixed costs, €800,000+ 100,000 shirts Fully allocated cost of the material for one golf shirt € 6.00 8.00 €14.00