Question 4 

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.

Required:

1. Determine a transfer price using the general transfer pricing rule.

2. 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?

3. Is the decision in the best interests of Wattle Limited as a whole? Explain.