Asked by Alexis Klein on May 17, 2024
Verified
Two of the decentralized divisions of Gamberi Electronics Corporation are the Plastics Division and the Components Division. The Plastics Division sells molded parts to both the Components Division and to customers outside the corporation.Assume that the Plastics Division is currently operating with idle capacity. Also assume that the Components Division wants to purchase from Plastics all of the additional parts that could be made with this idle capacity. In order to increase its current level of profitability, the Plastics Division should accept any transfer price on these additional parts that is above the:
A) variable cost of the additional parts.
B) full (absorption) cost of the additional parts.
C) variable cost of the additional parts plus the lost contribution margin on all units that could no longer be sold to customers outside the corporation.
D) full (absorption) cost of the additional parts plus the lost contribution margin on all units that could no longer be sold to customers outside the corporation.
Variable Cost
Costs that change in proportion to the level of goods or services that a business produces.
Additional Parts
Components or pieces beyond the basic requirements that are included in the manufacturing or assembly of a product.
Idle Capacity
Unused or underused production capability within a manufacturing facility, often resulting in inefficiency and lost potential revenue.
- Understand the concept of transfer pricing within a corporation.
- Recognize factors that impact decisions on transfer pricing, including variable expenses, unused capacity, and the cost of external supplies.
Verified Answer
Learning Objectives
- Understand the concept of transfer pricing within a corporation.
- Recognize factors that impact decisions on transfer pricing, including variable expenses, unused capacity, and the cost of external supplies.
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