Transfer Prices at Full Cost with Excess Capacity : Divisional Viewpoint

Karakomi Cameras Inc. has a Disposables Division that produces a camera that sells for $13.00 per unit in the open market. The cost of the product is $9.50 (variable manufacturing of $5.00, plus fixed manufacturing of $4.50). Total fixed manufacturing costs are $315,000 at the normal annual production volume of 70,000 units. The Overseas Division has offered to buy 20,000 units at the full cost of $9.50. The Disposables Division has excess capacity, and the 20,000 units can be produced without interfering with the current outside sales of 70,000 units. The total fixed cost of the Disposables Division will not change.

Should the Disposables Division accept or reject the offer? Show calculations of how you came up with answer and explanation.