Avra Valley Services has two divisions, Computer Services and Management Advisory Services. Both divisions work for external customers and, in addition, work for each other. Fees earned by Computer Services from external customers were $400,000 last year. Fees earned by Management Advisory Services from external customers were $700,000 last year. Computer Services worked 3,000 hours for Management Advisory Services last year, and Management Advisory Services worked 1,200 hours for Computer Services. The total costs of external services performed by Computer Services were $220,000, and for Management Advisory Services costs were $480,000.

REQUIRED

A. Determine the operating income for each division and for the company as a whole if the transfer price from Computer Services to Management Advisory Services is $50 per hour and the transfer price from Management Advisory Services to Computer Services is $60 per hour.

B. The manager of Computer Services has found another company willing to provide the same services as Management Advisory Services at $50 per hour. All of the employees in both units are guaranteed 40-hour work weeks. Currently, Management Advisory Services has idle capacity because of an economic downturn. Calculate the change in operating income for the company as a whole and for each division if Computer Services uses outsourced services instead of using Management Advisory Services.

C. Recommend a transfer price policy that would provide incentives to use the internal services. Explain your recommendation.

D. Discuss possible qualitative factors that might affect the attractiveness of the outsourcing option.