Problem 4;

TL Co. has a production division which is currently manufactured 120,000 units but has a capacity of 180,000 units.The variable cost of the product is P22 per unit and the total fixed cost is P720,000 or P6 per unit based on current production.

The Sales Division of TL Co. offers to buy 40,000 units from the Production Division at P21 per unit.The production Division manager refuses the order because the price is below variable cost.The Sales Division manager argues that the order should be accepted since by taking the order the Production Division manager can lower the fixed cost per unit from P6 to P4.50 (output will increase to 160,000 units).These decreases of P1.50 in fixed cost per unit will more than offset the P1 difference between the variable cost and the transfer price.

Required;

1.If you were the Production Division manager, would you accept the Sales Division manager's argument?___________ Why? (Assume that the 120,000 units currently produced sell for P30 per unit in the external market).

2.From the viewpoint of TL Co., should the order be accepted if the manager of the Sales Division intends to sell each unit to the outside market for P27 after incurring an additional processing cost of P2.25 per unit? Explain