18.27 Transfer price; incentives for internal services LO4, 5 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 in 2019. Fees earned by Management Advisory Services from external customers were $700 000 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 $220 000, and for Management Advisory Services costs were $480 000. 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