Kern Manufacturing has several divisions and evaluates performance using segment income. Since sales include transfers to other divisions, Kern has established a price for internal sales as cost plus 10%. Red Division has requested 10,000 units of Green Division's product. Green Division is selling its product externally at a 60% markup over cost. The corporate policy will encourage the Green Division to:
A) Transfer the product to the Red Division because all costs are being covered and the division will earn a 10% profit.
B) Reject the sale to the Red Division because it does not provide the same markup as external sales.
C) Accept the sale to the Red Division if it is operating at full capacity and the sale will contribute to fixed costs.
D) Transfer the product to the Red Division if it does not require the Green Division to give up any external sales.

Question

Quizplus · Accepted Answer

The corporate policy of pricing internal transfers at cost plus 10% ensures that the selling division covers its costs and earns a profit on the transfer. However, the Green Division would prefer selling externally to earn a 60% markup. Therefore, the policy encourages transfers to internal divisions like Red Division only if it doesn't result in lost external sales, where the markup is higher.

Kern Manufacturing Has Several Divisions and Evaluates Performance Using Segment