Wilson & Taylor plc is a multinational conglomerate. The company has a business division, Wilson & Taylor Tyres, which manufactures tyres for motorcycles and cars and is an automobile division, Wilson & Taylor Automobile, that manufactures cars. Wilson & Taylor Automobile purchase tyres for its automobiles from an outside vendor. However, at the end of the current month, the contract with the vendor for the tyres of vans will expire. Senior management at Wilson & Taylor Plc feel that the automobile division of the company should purchase tyres for vans from its own tyre division rather than renewing the contract with the outside vendor. The managers of both divisions are also
interested in having intra-company transactions as it will be in the best interests of both divisions as well as the company as a whole.
The tyres for vans manufactured by Wilson & Taylor Automobile are of standard size. They are radial tyres (i.e. 185/70R14) and have a width of 7.28 inches, a height of 70 inches and a diameter of 14 inches. Wilson & Taylor Automobile needs 15,000 tyres in a month to manufacture vans. The quality of the tyres supplied by the outside vendor and those manufactured by Wilson & Taylor Tyres are similar. Wilson & Taylor
Automobile currently pays £73 to the outside vendor for a van tyre. However, Wilson & Taylor Tyres charges £74 for a van tyre. The production capacity of the division is 50,000 van tyres per month. The variable cost to produce one van tyre is £35. The fixed cost incurred in the manufacture of van tyres is £100,000 per month.

Required
1. Determine the acceptable range of transfer prices if Wilson & Taylor Tyres sells 37,000 van tyres per month.
(a) If Wilson & Taylor Automobile proposes to buy van tyres at £45 each from Wilson & Taylor Tyres, would the management of Wilson & Taylor Tyres be interested in the proposal?
(b) If Wilson & Taylor Automobile proposes to buy van tyres at £45 each from Wilson & Taylor Tyres, would the management of Wilson & Taylor Tyres be interested in the proposal?
2. Wilson & Taylor Automobile proposes buying van tyres at £45 each from Wilson & Taylor Tyres. If Wilson & Taylor Tyres sells 45,000 van tyres per month, will the management of Wilson & Taylor Tyres still be interested in Wilson & Taylor Automobile’s proposal?
3. What are the advantages and disadvantages of the method used by Wilson & Taylor plc to negotiate the transfer price?