Final answer:
The decision to sell motors internally or accept an external contract depends on capacity, opportunity costs, and strategic company objectives; it involves considerations of transfer pricing policies and marginal costs.
Step-by-step explanation:
The decision whether the Cole division should sell motors to the diamond division at the prevailing market price or accept the Wales company contract is a common scenario in managerial accounting and transfer pricing. If the Cole division has excess capacity and can produce the motors without incurring opportunity costs, selling them to the diamond division at market price might be beneficial. However, if the Cole division would have to forgo the Wales company contract, which might offer a higher price or better terms, it would need to weigh the potential profit against the internal benefits of selling to the diamond division.
Another consideration is the overall company benefit. If the diamond division can procure the motors internally at a market rate, the profits stay within the company. When analyzing such scenarios, decision-makers should calculate the marginal costs and the contribution each option brings to the company's profitability.
Ultimately, the decision will rest on factors such as capacity, opportunity costs, transfer pricing policies, and overall strategic objectives for the company.