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.

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Manoj Kattel · Accepted Answer

Final Answer : A, Explanation :  The Plastics Division should accept any transfer price on the additional parts that is above the variable cost of the parts. This would ensure that the sale of additional parts to the Components Division generates a contribution margin that is greater than the variable cost of producing those parts, thus increasing the Plastics Division's profitability. Choosing B, C, or D would result in accepting a transfer price that is higher than the actual cost of producing the additional parts, resulting in a lower contribution margin for the Plastics Division.

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