Stavos Company's Screen Division manufactures a standard screen for high-definition televisions (HDTVs). The cost per screen is:

Variable cost per screen $ 70

Fixed cost per screen 30*

Total cost per screen $100

Based on a capacity of 10,000 screens per year

Part of the Screen Division's output is sold to outside manufacturers of HDTVs and part is sold to Stavos Company's Quark Division, which produces an HDTV under its own name. The Screen Division charges $140 per screen for all sales.

The net operating income associated with the Quark Division's HDTV is computed as follows:

Selling price per unit $480

Variable cost per unit:

Cost of the screen $140

Variable cost of electronic parts210

Total variable cost 350

Contribution margin 130

Fixed costs per unit 80*

Net operating income per unit $50

The Quark Division has an order from an overseas source for 1,000 HDTVs. The overseas source wants to pay only $340 per unit.

Required:

1.Assume the Quark Division has enough idle capacity to fill the 1,000-unit order. Is the division likely to accept the $340 price or to reject it? Explain.

2.Assume both the Screen Division and the Quark Division have idle capacity. Under these conditions, what is the financial advantage (disadvantage) for the company as a whole (on a per unit basis) if the Quark Divisionrejectsthe $340 price?

3.Assume the Quark Division has idle capacity but that the Screen Division is operating at capacity and could sell all of its screens to outside manufacturers. Under these conditions, what is the financial advantage (disadvantage) for the company as a whole (on a per unit basis) if the Quark Divisionacceptsthe $340 unit price.

4.What conclusions do you draw concerning the use of market price as a transfer price in intra-company transactions?