Activity 3. Now, let's apply concepts on transfer pricing. Problem 1 (adapted)

The Quarantine Company has two divisions, ECQ and MECQ.Productionmanufactures pants, which it sells to both the Marketing Division and to the outside marketunderadifferentbrandname. Marketingoperatesnumerouspantsstores,and it sells both Quarantine pants and other brands. The following facts also pertain to Quarantine:

oSales price to retailers if sold by Production: P380 perpair

oVariable Cost to produce: P190 perpair

oFixed Costs: P2,000,000 permonth

oProduction is operating far below itscapacity.

oSales price to customers if sold by Marketing: P500 perpair

oVariable marketing costs: 5% of salesprice

Marketing has decided to reduce the sales price of Quarantine pants. Thecompany's variable manufacturing and marketing costs are differential to this decision, whereas fixed manufacturing and marketing costs arenot.

Required:

a.What is the minimum price that can be charged for the pants and still cover differential manufacturing and marketingcosts?

b.What is the appropriate transfer price for thisdecision?

c.What if the transfer price were set at P380? What effect would this have on the minimum price set by the marketingmanager?

d.How would you answer to questions a and b change if the Production Division had been operating at fullcapacity?