Telly Ltd manufactures and sells high-definition televisions. The Screen Division manufactures screens at a standard variable cost of $120 per unit. The screens are then transferred to the Television Division to make the final product, televisions, which are sold for $650 per unit. The additional standard variable cost in the Television Division is $340 per unit. The Screen Division can also sell their screens to the external market at $190 per unit, but it will incur an additional selling cost of $5 per unit.

Required:

(a)Assume that the Screen Division has spare capacity. Calculate the transfer price using the general rule. Show workings.(1 mark)

(b)Assume that the Screen Division has no spare capacity. Calculate the transfer price using the general rule. Show workings.(1 mark)

(c)Assume that the Screen Division has no spare capacity, and the transfer price is based on standard variable production cost plus a 40% markup. Compare the contribution margin resulted from the internal sales and external sales of screens. Is it likely that the internal transfer will take place?(2 marks)

(d)Assume that the Screen Division has limited spare capacity and can only supply 80% of the required 3,000 screens to the Television Division. To supply all of the 3000 screens, it has to forgo some sales to external customers. Use the general rule to calculate the transfer price per screen. Show workings.(2 marks)

(e)Assume that both divisions have spare capacity. The Television Division has been approached by an outside company with a special order for 500 televisions at $570 per unit.

(i) Is this offer in the best interests of Telly Ltd as a whole? Why?(1 mark)

(ii) Assuming that the transfer price for the screen is $160 per unit, calculate the contribution margin per unit that each division would receive from the special order.(2 marks)

(iii) Calculate the transfer price for the screen at which the contribution margin from the special order is divided equally between the two divisions.(1 mark)