Question:

EB Electronics has two divisions: assembly and electronics. The assembly division transfers partially completed components to the electronics division at a predetermined transfer price. The assembly division's standard variable production cost per unit is $350 and could sell all of its components to outside buyers at $470 per unit in a perfectly competitive market.

REQUIRED:

(a) What would be the minimum transfer price assuming the assembly division has spare capacity?

(b) What transfer price would you recommend if there was no outside market for the transferred component and the assembly division had spare capacity? Explain your answer.

Additional Information:

The assembly division's full cost of a component is $410, which includes $60 of applied fixed overhead costs. The transfer price has been set at $451, which is the assembly division's full cost plus a 10 per cent markup.

The electronics division has a special offer of $588 for its product. The electronics division incurs variable costs of $150 in addition to the transfer price for the assembly division's components. Both divisions currently have spare production capacity.

REQUIRED:

(c) Is the electrical division manager likely to want to accept or reject the special offer based on this additional information? Show your calculations to explain your answer.

(d) Refer to your answer in (c) above - Is this decision in the best interests of EB Electronics as a whole? Show your calculations to explain your answer.