Armando Corporation consists of two manufacturing divisions: Crater Division and Dollar Division. The Crater Division manufactures and transfers partially processed components to the Dollar Division at a predetermined transfer price. It could also sell these components to outside buyers at $480 per unit in a perfectly competitive market.

The standard cost per unit in each division is as follows:

crater Division Dollar Division

Direct material $75 $160

Direct labour $80 $110

manufacturing overhead $550* $360**

*Manufacturing overhead is 60% variable and 40% fixed.

**Manufacturing overhead is 45% variable and 55% fixed.

The Dollar Division can sell the finished product to outsiders at $1,220 per unit.

Required:

a. What transfer price would you recommend if there was no outside market for the partially processed component and Crater Division had spare capacity? Does it matter if Crater Division is identified as a cost centre or a profit centre? Explain your answer.

b. Assume that the head office has intervened to dictate the transfer price at standard absorption cost plus a 10% mark up. The Dollar Division has been approached with a special order for 500 components at $1,020 each. From the perspective of Armando Corporation as a whole, should the special order be accepted or rejected? Explain and show the supporting calculations.

c.Advise whether is desirable for the head office to dictate the transfer price? Explain your answer.