Question III $(25$ Marks $=30$ minutes$)$

Cotplum Company has $2$ divisions which are independent profit centers. Division A manufactures a

special ingredient $x$ and has a capacity of $15,000$ units per year. Division B uses $1$ unit of $x$ as one of

the ingredients to produce $1$ unit of product $Y$ and has a capacity of $7,200$ units. Capacity of both

divisions cannot be changed in a short run. If Division $B$ buys $x$ from Dix#isien $A,$ it does not require

any packaging; however, if it buys $x$ from outside suppliers, it will incur shipping cost of $$5$ per unit.

The unit product costs of $x$ and $Y$ are as follows $($assume operating at full capacity$)$:

Required: $($Each numerical requirement is independent; Round to $2$ decimal places, Show workings$)$

$(1)$ Assume that external market demand for Product $x$ is $15,000$ units at a selling price of $$30$

per unit while external market demand for Product $Y$ is $7,200$ units at a selling price of $$80$

per unit.

a$.$ What is the range of the transfer prices over which Division A and $B$ would be willing

to negotiate?

$(2$ marks$)$

b$.$ In order to maximize the Company's operating income, suggest how many units of

Product $x$ should be transferred from Division A to Division B$.$ Compute the maximum

amount of operating income for Cotplym Company.

$(8$ marks$)$

$(2)$ Assume that external market demand for Product $x$ is $10,000$ units at a selling price of $$30$

per unit while external market demand for Product $Y$ is $7,200$ units at a selling price of $$80$

per unit.

a$.$ What is the range of the transfer prices over which Division A and B would be willing

to negotiate?

$(4$ marks$)$

b$.$ Describe the conflict between Division A and B regarding the internal transfer of

Product $x.$ Suggest ways for Division A and B to resolve the conflict and advice

Sotslum about the basis of transfer pricing which should be employed. $(6$ marks$)$

$(3)$ Assume that Division A could sell $10,000$ units of Product $x$ to external customers at a selling

price of $$30$ per unit while Division B has a demand of $5,000$ units of Product $Y$ at a selling

price of $$90$ per unit. Regarding internal transfer of Product $x,$ Cotslycu mandates the

transfer price be $150\%$ of its full cost. At the same time, Division A receives a one$-$time

special order from an external customer for $5,000$ units of Product $x.$ The special order

requires a special tool costing $$5,500$ to satisfy the order requirement. At which unit selling

price on the special order would Division $A$ be indifferent between internal transferring and

accepting the special order?

$(5$ marks$)$