The data for Kirkland Metal Corporation has been given in P9-49A. Assume that the transfer price for the component has been set at $374, which is the fabrication division's total cost plus a 10% markup. Fabrication division's total cost of a component is $340, which includes fixed overhead applied at the rate of $400,000 of budgeted fixed overhead costs on budgeted annual production of 10,000 units. The assembly division has a special offer for its product of $435. The assembly division incurs variable costs of $100 in addition to the transfer price for the fabrication division's components. Both divisions currently have excess capacity.
Instructions
Answer the following questions:
(a) What is the assembly division's manager likely to do regarding acceptance or rejection of the special offer? Why?
(b) Is this decision in the best interests of the company as a whole? Why?
(c) How could the situation be remedied using the transfer price?