Figure 2
Klaehn Industries is a decentralized company that evaluates its divisions based on ROI. The Fahl Division has the capacity to make 1,000 units of a component. The Fahl Division's variable costs are £40 per unit.
The Melton Division can use the component in one of its products. The Melton Division would incur £50 of variable costs to convert the component into its own product that sells for £160.
-Refer to Figure 2. Assume the Fahl Division can sell all that it produces for £100 each. The Melton Division needs 100 units. What is the correct transfer price?

Question

Quizplus · Accepted Answer

The correct transfer price is £100, which is the price at which the Fahl Division can sell the component externally. Since the Fahl Division can sell all it produces at £100 each, this price ensures the division covers its costs and earns a profit without disadvantaging the selling division.

Figure 2 Klaehn Industries Is a Decentralized Company That Evaluates Its Divisions