A Company Has Two Divisions: One Making Components and the Other

question 2

Multiple Choice

A company has two divisions: one making components and the other electrical goods. The component division sells a heating ring to the electrical goods division to make kettles but this division can buy a similar component from an outside supplier for £12. The costs of a heating ring made by the component division include a variable cost of £8 and an allocation of overhead costs of £5.
If there is spare capacity in the component division, what should the transfer price be?

• A) Below £12
• B) Above £8
• C) Between £12 and £8
• D) Above £12

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