Wattle Limited has two divisions: Industry and Consumer. The Industry Division transfers partially completed components to the Consumer Division at a predetermined transfer price. The Industry Division’s standard variable production cost per unit is $500. This division could sell all its components to outside buyers at $650 per unit in a perfectly competitive market.
The Consumer Division has a special offer of $740 for its product. The Consumer Division incurs variable costs of $260 in addition to the transfer price for the Industry Division’s components. Both Industry and Consumer divisions currently have spare production capacity.
- Determine a transfer price using the general transfer pricing rule.
- Assume that the transfer price has been set at $530, is the Consumer Division manager likely to want to accept or reject the special offer? Why?
- Is the decision in the best interests of Wattle Limited as a whole? Explain.
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