3: Transfer pricing, Special-orders, Outsourcing Alan Inc. is an electronic manufacturing Division plant (Division 1) which produces mini motor armatures. The company has recently established a second plant (Division 2) which produces electronic shavers. Mini motor armatures can be sold to the outside market or be transferred to Division 2 to be used in the electronic shavers. Both divisions are treated as profit centres and can freely choose their suppliers and customers. If the products are transferred internally between two divisions, no packaging and advertising cost will be incurred for Division 1. Division 2 can buy mini motor armatures from the outside market at its current market price ($20) minus 50% for any order of 10,000 units or more. Data regarding both Divisions for the last month is presented as follows: Capacity per month (units) Market selling price per unit Direct labour cost per unit Direct material cost per unit ($) Variable overhead cost per unit ($) Packaging cost per unit ($) Variable advertising cost per unit ($) Division 1 Division 2 400,000 300,000 $20 $100 $3 $20 3 5 1 4 1 3 1 2 $800,000 $1,200,000 300,000 500,000 Fixed costs for the month for the division ($) Total external demand per month for the divisions (units) Required a. Determine the minimum transfer price per unit that Division 1 would accept for an order of 100,000 units from Division 2 (based on current demand and current capacity). b. Determine the maximum transfer price per unit that Division 2 would pay for any order size from Division 1. c. Determine what transfer price per unit would be the best for Alan Inc as a whole (based on current demand and current capacity). d. What transfer price per unit would you recommend if Division 1 had no spare capacity? e. What transfer price per unit would you recommend for Division 1 if Division 2 wants to acquire all it needs (300,000 units) from Division 1? f. Determine the minimum special-order unit price for Division 1 if the Division receives a special order for 150,000 mini motor armatures from an outsider (packaging is needed but not advertising)? g. Identify two qualitative factors that Alan Inc should consider when deciding whether to sell the mini motor armatures to the Second Division or outside market. h. As the manager of Division 1, what arguments might you use to encourage the manager of Division 2 to purchase the mini motor armatures from Division 1 rather than from the outside market