The Atlantic Company is a multidivisional company. Its managers have full respon
ID: 2514176 • Letter: T
Question
The Atlantic Company is a multidivisional company. Its managers have full responsibility for profits and complete autonomy to accept or reject transfers from other divisions. Division A produces a sub-assembly part, for which there is a competitive market. Division B currently uses this sub-assembly for a final product that is sold outside at $2,400 Division A charges division B market price for the part, which is $1,450 per unit. Variable costs are $1,020 and $1,240 for divisions A and B, respectively. The manager of division B feels that division A should transfer the part at a lower price than market because, at market, division B is unable to make a profit. Assume that division A can sell all its production in the open market. Should division A transfer the goods to division B?Explanation / Answer
(b) Division A should not transfer to Division B at a price lower than $1,450.
Division A is able to sell all its production in outside Market and if division A transfers at a price lower than $1450, there would be a loss of contribution
Contribution Earned from selling Outside = $1450 - $1020 = $420
Contribution Earned from Selling to Division B and Division B sells Outside = $2400 - $1020 - $1240 = $140
Hence, Transferring to Division B is not Benifical from the company as a whole as well as division A
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