Question 2: (16 marks) (B1, C1) The Fruity Bakers specialize in making delicious cakes. Their trademark fruit cake is made in Division X (the supplying division) and sold to external customers for them to decorate, or it can be enjoyed plain. It is also transferred to Division Y (the receiving division) where it is iced and decorated to be sold as a luxury wedding cake. Fruity Bakers are currently trying to decide what the optimum price to sell the cakes from Division X to Y should be in order to motivate the managers of both divisions. The following data shows the costs incurred by Division X to make a fruit cake and by Division Y to ice and decorate the wedding cake: S/unit Division X Variable costs 22 Fixed overhead 9 31 1 Division Y Variable costs 33 Fixed overhead 100 41 Plain fruit cakes can be sold and purchased extemally for $35. Wedding cakes can be sold for $80. Instructions: 1. Should the company make the fruit cakes internally or buy them in? (2 marks) 2. What non-financial factors should also be taken into consideration? (2 marks) 3. What would be the implication of using the following transfer pricing policies? (12 marks) a. Variable cost plus 30% b. Variable cost only c. The external market price d. Full cost plus 5%