Brighto Ltd has two divisions. The Oakland Division transfers partially completed components to the Westlake Division at a predetermined transfer price. The Oakland Divisions production costs per unit include $400 of variable production costs and $70 of applied fixed overhead costs. The Oakland Division has no spare capacity, and it could sell all of its components to outside buyers at $580 per unit in a perfectly competitive market. The Westlake Division incurs variable costs of $200 in addition to the transfer price for the Oakland Divisions components and sells its finish products at $750 per unit.

Required:

1. Determine a transfer price using the general rule. (1 mark)

2. How would the transfer price change if the Oakland Division has spare capacity? (1 mark)

3. Assume that a transfer price has been set as the Oakland Divisions absorption cost plus a 10% markup and both divisions have spare capacity. The Westlake Division has a special offer of $680 per unit for its product.

a. Calculate the transfer price. (1 mark)

b. Is this special offer in the best interests of Brighto Ltd as a whole? Why? (2 mark)

c. Would an autonomous Westlake Divisions manager accept or reject the special offer? Is this decision in the best interests of Brighto Ltd as a whole? Explain. (2 marks)

d. How could the situation be remedied using the transfer price? (2 marks)