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Question 8: Coolbreeze Co manufactures refrigerators. The company isorganizedon a divisionalised basis
and has two divisions (compressor and cabinet).
The compressor division transfers 65% of its output to the cabinet division for $85 per unit, and sells
the rest of its output to external companies for $92 per unit.
The cabinet division sells the final product at an average selling price of $495 per unit. In the next
month, it expected that the compressor division will produce 27,000 units. The variable cost of
manufacturing compressors is $62 per unit.
Assuming that the divisions operate with total autonomy, which of the following options is the most
likely reason for making internal transfers at a value which is less than the external selling price of the
compressor division?
A. Head office has imposed the transfer price.
B. The management of the compressor division are seeking to restrict the quantity produced.
C. Some additional costs are incurred on external sales.
D. The transfer price has been set to allow the cabinet division to compete through lower prices.
Correct Answer: C
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