1B2K KERN MANUFACTURING HAS SEVERAL DIVISIONS AND EVALUATES PERFORMAN...

129. CSO: 1B2b LOS: 1B2k

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.