Question $10\mathrm{.}2($Total: $36$ marks$)$ Wookiee Business Ltd$.$ has two divisions. The Compound Division makes BB$8,$ an industrial compound, which is then transferred to the Processing Division. The Processing Division further processes the BB$8$ and sells the final product to customers at $\backslash (\backslash$$ $87/\backslash$mathrm$\{$kg$\}\backslash ).$ Capacity in the Compound Division is $\backslash (800,000\backslash$mathrm$\{$~kg$\}\backslash ).$ BB$8$ can be obtained on the external market at $\backslash (\backslash$$ $50/\backslash$mathrm$\{$kg$\}\backslash )$ Data regarding the costs per kilogram in each division are presented below: $*$In the Compound Division the variable overhead is $\backslash (80\backslash \%\backslash )$ of the total, and in Processing variable overhead represents $65\backslash \%$ of the total. Fixed overhead rates are based on capacity of $\backslash (800,000\backslash$mathrm$\{$~kg$\}\backslash )$ in each division. In addition to the manufacturing costs, the Compound Division would incur $\backslash (\backslash$$ $2\backslash )$ per kilogram of selling costs which would be avoided on internal transfers. Similarly the Processing Division would avoid $\backslash (\backslash$$ $3/\backslash$mathrm$\{$kg$\}\backslash )$ of ordering costs on internal purchases. Required $1.$ Calculate the operating incomes for each division assuming $\backslash (800,000\backslash$mathrm$\{$~kg$\}\backslash )$ of BB$8$ are transferred and the company uses a market transfer price. $2.$ Calculate the operating incomes for each division assuming $\backslash (800,000\backslash$mathrm$\{$~kg$\}\backslash )$ of BB$8$ are transferred and the company uses a transfer pricing policy based on $\backslash (125\backslash \%\backslash )$ of absorption manufacturing cost. $3.$ Should the company transfer its $\backslash (800,000\backslash$mathrm$\{$~kg$\}\backslash )$ assuming the Compound Division can sell all of its output on the external market? What is the difference in contribution margin?