Question: SDF has two divisions: Division F, which makes a single component for which there is a market with many suppliers and many customers; and Division

SDF has two divisions: Division F, which makes a single component for which there is a market with many suppliers and many customers; and Division K, which uses the component in the production of electrical products. Each component costs Division F $4 per unit in materials and $8 per unit in labour and variable overheads and it incurs fixed overheads of $25,000 per quarter. The market price for the component is $22. SDF wants to use a transfer pricing system that provides divisional autonomy and motivation whilst ensuring maximisation of company profits. Which option would come closest to achieving SDF's stated objectives? Solution

A.Head office sets the transfer price at $12.

B.Head office sets the transfer price at $22.

C.Institute a two-part tariff of $12 plus $25,000 per quarter.

D.Allow the managers of the two divisions to negotiate the transfer price

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