SDN company has two divisions. Division A makes a component X, which is transferred to the Division B. Component X is further processed by the Division B and is sold to customers at a price of $200 per unit. Division A is currently required by the company to transfer its total output of 250,000 units of component X to Division B at 120% of full manufacturing cost. Unlimited quantities of component X can be purchased and sold to outsider at $100 per unit. Division B can also purchase the same component at $100 per unit.

The following table shows the manufacturing cost per unit of Division A and B for 2020

Direct cost

Division A $34 Division B $31

Required

Variable Indirect cost

$27 $12

Fixed Indirect cost

$9 $18

1.Calculate the operating income for both divisions for the 250,000 units of component X transferred if the company adopted the following transfer pricing method (a) market price and

(b) 120% of full manufacturing cost.

(4 marks)

2.Assume the company allows divisions to negotiate a transfer price and there is idle capacity in Division A to supply all units required by Division B. What is the minimum and maximum

transfer price that Division A and Division B will accept respectively? Explain

(2 marks)

3.Evaluate and explain the transfer price policy of 1(a) and 1 (b) using the criteria of goal congruence, evaluating division performance, motivating management effort and preserving divisional autonomy.(6 marks)