Question Five: (14 marks) (B1, C3)

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:

		$/unit
Division X	Variable costs	22
	Fixed overhead	9
		31
Division Y	Variable costs	33
	Fixed overhead	8
		41

• Plain fruit cakes can be sold and purchased externally for $35.
• Wedding cakes can be sold for $80.

Instructions:

1. Should the company make the fruit cakes internally or buy them in? (1 mark)
2. What non-financial factors should also be taken into consideration? (1 marks)
3. What would be the implication of using the following transfer pricing policies? (12 marks)
   1. Variable cost plus 30%
   2. Variable cost only
   3. The external market price
   4. Full cost plus 5%