Problem 12 (Transfer Pricing; Divisional Performance) KCC, Inc., is a decentralized organization with five divisions. The company's Electronics Division produces a variety of electronics items, including a KK8 circuit board. The division (which is operating at capacity) sells the KK8 circuit board to regular customers for P125.00 each. The circuit boards have a variable production cost of P82.50 each. The company's Clock Division has asked the Electronics Division to supply it with large quantity of KK8 circuit boards for only P90 each. The Clock Division, which is operating at only 60% of capacity, will put the circuit boards into a timing device that it will produce and sell to a large oven manufacturer. The cost of the timing device being manufactured by the Clock Division follows: KK8 circuit board (desired cost) Other purchased parts (from outside vendors) Other variable costs Fixed overhead and administrative costs Total cost per timing device P 90.00 300.00 207.50 100.00 P697.50 The manager of the Clock Division feels that she can't quote a price greater than P700 per timing device to the oven manufacturer if her division is to get the job. As shown above, in order to keep the price at P700 or less, she can't pay more than P90 per unit to the Electronics Division for the KK8 circuit boards. Although the price for the KK8 circuit boards represents a substantial discount from the normal P125.00 price, she feels that the price concession is necessary for her division to get the oven manufacturer contract and thereby keep its core of highly trained people. The company uses return on investment (ROI) to measure divisional performance. Required: 1. Assume that you are the manager of the Electronics Division. Would you recommend that your division supply the KK8 circuit boards to the Clock Division for P90 each as requested? Why or why not? Show all computations. 2. Would it be profitable for the company as a whole for the Electronics Division to supply the Clock Division with the circuit boards for P90 each? Explain your answer. 3. In principle, should it be possible for the two managers to agree to a transfer in this particular situation? If so, within what range would that transfer price lie?