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The production division currently makes and transfers all 100,000 components to the retail division, which completes the assembly and sells it to individual consumers for $15, after incurring additional costs of $2.50 per unit. The production division has been offered the chance to sell all the components it can produce to a commercial buyer who is willing to pay $11 per unit. The retail division can source components externally at a price of $11.50. Assume the maximum demand for the retail division’s product is 100,000
The Finance Director of Abel Co is considering switching away from the current policy, but is concerned about how the Production division will cover its fixed costs.
Which of these methods will NOT help address the problem?
1.Giving the production and retail divisions a share of Abel Co’ s overall contribution
2.Setting the transfer price at variable cost, but reporting the value of the transfer for the Production division at total cost
3.Setting the transfer price at market value if an external market exists for the product
4.Transferring a fixed fee to the Production division.– The answer is 3.
– Could you explain what does 2 actually mean and secondly why it is not the answer?
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