$18\mathrm{.}27$ Transfer price; incentives for internal services

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 $$400000$ in $2019.$ Fees earned by Management

Advisory Services from external customers were $$700000$ in $2019.$ Computer Services worked

$3000$ hours for Management Advisory Services in $2019,$ and Management Advisory Services worked $1200$ hours for Computer Services. The total

costs of external services performed by Computer Services were $$220000,$ and for Management Advisory Services costs were $$480000.$

Required

$($a$)$ Determine the operating income for each division and for the entity 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 entity 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 working weeks. Currently, Management Advisory Services has idle capacity

because of an economic downturn. Calculate the change in operating income for the entity as a whole 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.