(a) The transfer pricing method used for the transfer of an intermediate product between two divisions in a group has been agreed at standard cost plus 30% profit markup. The transfer price may be altered after taking into consideration the planning and operational variance analysis at the transferor division. Discuss the acceptability of this transfer pricing method to the transferor and transferee divisions. (5 marks)

(b) Division A has an external market for product X which fully utilises its production capacity. Explain the circumstances in which divi- sion A should be willing to transfer product X to division B of the same group at a price which is less than the existing market price. (5 marks)

(c) An intermediate product which is converted in divisions L, M and N of a group is available in limited quantities from other divisions within the group and from an external source. The total available quantity of the intermediate product is insufficient to satisfy demand. Explain the procedure which should lead to a transfer pricing and deployment policy resulting in group profit maximisation.