QUESTION ONE In recent years, Newtech plc has been manufacturing microchips for smartphones. It has only distributed and sold the microchips for Digion Inc.'s dPhone range. Digion Inc. has decided to utilise these microchips for its exciting new dPad product. However, the microchips require further development for the dPad. As a result of this, Newtech plc has now restructured into a divisionalised structure of two divisions: the dPhone department and the dPad department. The dPhone department is to sell its microchip product to fulfil the dPad department's demand. The below table shows the standard cost incurred to make one microchip: Quantity Cost Standard costs for one microchip Direct Materials Direct Machine Hours Variable Overheads (absorbed on a direct machine hour basis) 100g 2.5 machine hours 350.00 per kg 8 per hour 9 per hour The selling price is based on a 28% mark up on variable costs. Required: (a) Calculate contribution per microchip. Determine the 'ideal' transfer price for one microchip sold by the dPhone division to the dPad division if; (i) the dPhone Division was operating below full capacity but the contract for the dPad was accepted, and (ii) the dPhone Division was operating at full capacity. (10 Marks) (b) Explain the four alternative approaches to setting transfer prices and give a brief explanation upon how each is determined. (16 Marks) (c) One limitation of transfer prices is considered to be that of "demotivation of the buyer and/or seller, especially if managers receive profit-related pay". Critically argue where each transfer pricing approach may lead to management demotivation or conflict. (16 Marks) (d) With reference to domestic and international transfer pricing, critically argue the concepts of 'goal congruence' and 'dual pricing'. (8 Marks)