Warriner Corporation has two divisions. The Fabrication Division transfers partially completed components to the Assembly Division at a predetermined transfer price. The Fabrication Divisions production costs per unit include $300 of variable production costs and $40 of applied fixed overhead costs. The Fabrication Division has no spare capacity, and it could sell all of its components to outside buyers at $380 per unit in a perfectly competitive market. The Assembly Division incurs variable costs of $100 in addition to the transfer price for the Fabrication Divisions components and sells its finished products at $530 per unit.

Required:

1. Determine a transfer price using the general rule. (1 mark)

2. How would the transfer price change if the Fabrication Division has spare capacity? (1 mark)

3. Assume that a transfer price has been set as the Fabrication Divisions absorption cost plus a 10% markup and both divisions have spare capacity. The Assembly Division has a special offer of $465 per unit for its product.

a. Calculate the transfer price.

b. Is this special offer in the best interests of Warriner Corporation as a whole? Why?

c. Would an autonomous Assembly Divisions manager accept or reject the special offer? Is this decision in the best interests of Warriner Corporation as a whole? Explain.

d. How could the situation be remedied using the transfer price?