You should attempt to answer this question yourself before looking up the suggested answer, which appears on pages 867-868. If any part of your answer is incorrect, check back carefully to make sure you understand where you went wrong.

A company has two divisions. South division manufactures an intermediate product for which there is no intermediate external market. North division incorporates this intermediate product into a final product, which it sells. One unit of the intermediate product is used in the production of the final product. The expected units of the final product which North division estimates it can sell at various selling prices are as follows:

The costs of each division are as follows:

The transfer price is £35 for the intermediate product, and is determined on a full cost-plus basis.
You are required to:

(a) Prepare profit statements for each division and the company as a whole for the various selling prices.

(b) State which selling price maximizes the profit of North division and the company as a whole, and comment on why the latter selling price is not selected by North division.

(c) State which transfer pricing policy will maximize the company's profit under a divisional organization

Net selling price () Quantity sold (units) 100 888288 1000 90 2000 80 3000 70 4000 60 5000 50 6000