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The Assembly division of Canadian Car Company: Transfer pricing

The Assembly division of Canadian Car Company has offered to purchase 90,000 batteries from the Electrical division for $104 per unit. At a normal volume of 250,000 batteries per year, production costs per battery are as follows:

Direct materials
Direct mfg. labour
Variable factory overhead
Fixed mfg. overhead
Total $40
20
12
40
$112

The Electrical division has been selling 250,000 batteries per year to outside buyers at $136 each. Capacity is 350,000 batteries per year. The Assembly division has been buying batteries from outside sources for $130 each.
a. Should the Electrical division manager accept the offer? Explain.

b. From the company's perspective, will the internal sales be of any benefit? Explain.

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The Assembly division of Canadian Car Company has offered to purchase 90,000 batteries from the Electrical division for $104 per unit. At a normal volume of 250,000 batteries per year, production costs per battery are as follows:

Direct materials
Direct mfg. labour
Variable factory overhead
Fixed mfg. overhead
Total $40
20
12
40 ...

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