Peat, Ernst and Touche (PET) is a very large accounting firm. Its main activity and revenue earner,is undertaking audits of publicly owned companies' accounts. Increasingly, the audit teams have made use of PET's central computer facility and staff, whose prime role had been to serve senior partners in the administration of the firm. The senior partners are in favour of the increased use of the central computer and staff, and their services have not previously been charged to audit team users.

However, the supervisor of the central computer has recently submitted a budget that requires 5 extra staff and capital expenditure of f200000 in meeting the expected demand for computer services.

Required:

(a) to isolate clearly the factors that the senior partner should consider in deciding whether to charge the audit teams for the computer services or not;

(b) to evaluate the merits and limits of using a marginal cost transfer price for the services in the short and long term;

(c) to outline the financial performance measure far the audit team consistent with a marginal cost transfer price.