E 12.30

Refer to Exercise 12.29 (above).The Assembly Divisions' absorption cost of a component is $ 510, which includes a4 60 of applied fixed overhead costs. The transfer price has been set at $ 561, which is the Assembly Divisions' absorption costs plus 10% 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 Divisions' components. Both divisions currently have spare production capacity.

Required:

1.Is the Electrical Division manager likely to want 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?