MCP plc specializes in providing marketing, data collection, data processing and consulting services. The company is divided into divisions that provide services to each other and also to external clients. The performance of the divisional managers is measured against profit targets that are set by central management. During October, the Consulting division undertook a project for AX plc. The agreed fee was £15,500 and the costs excluding data processing were £2,600. The data processing, which needed 200 hours of processing time, was carried out by the Data Processing (DP) division. An external agency could have been used to do the data processing, but the DP division had 200 chargeable skilled hours available in October. The DP division provides data processing services to the other divisions and also to external customers. The budgeted costs of the DP division for the year ending 31 December 2002, which is divided into 12 equal monthly periods, are as follows:
................................................................................................... £
Variable costs:
Skilled labour (6,000 hours worked)........................... 120,000
Semi-skilled labour.......................................................... 96,000
Other processing costs................................................... 60,000
Fixed costs:..................................................................... 240,000
These costs are recovered on the basis of chargeable skilled labour hours (data processing hours) which are budgeted to be 90% of skilled labour hours worked. The DP division’s external pricing policy is to add a 40% mark-up to its total budgeted cost per chargeable hour. During October 2002, actual labour costs incurred by the DP division were 10% higher than expected, but other costs were 5% lower than expected.

Required:
a) Calculate the total transfer value that would have been charged by the DP division to the Consulting division for the 200 hours on its AX plc project, using the following bases:
i) actual variable cost;
ii) standard variable cost + 40% mark-up;
iii) market price.

b) Prepare statements to show how the alternative values calculated in answer to requirement
(a) above would be reflected in the performance measurement of the DP division and the Consulting division.
c) Recommend, with supporting calculations, explanations and assumptions, the transfer value that should be used for the 200 hours of processing time in October. Your answer need not be one of those calculated in your answer to requirement (a) above.