A Canadian corporation has several divisions. Division Abroad (DA) is located outside Canada, and it produces units of product Q321, which are imported into Canada by Division Canada (DC). All DC products are sold in the Canadian market. DC sells other products in addition to Q321. Paul Querbes is the director of DC. He is examining the financial statements, especially the profit and loss statement of his division. He is concerned that the profits are low again this year and that he may not be able meet the threshold to get his annual bonus. The bonus of the division is based on return on investment (ROI). If ROI is above 12%, the manager receives a bonus. One major concern for Paul is the corporation's transfer pricing policy. The transfer price for product Q321 is determined by the taxation department at the head office. The department has the mandate to minimize income tax. DA is located in a country where income tax rates for corporations are much lower than in Canada. Paul believes that the price of Q321 is too high and that it affects the profitability of his division. Almost 40% of DC's sales come from Q321, and this should remain the same for the coming year. What makes the situation difficult for Paul when dealing with this transfer pricing problem is that there is no market price abroad for the products. DA can produce 3,000 units of Q321. It is now producing 2,500 units and sells all its production to DC for $250 per unit.

The costs for this production are the following: Material $ 90 Direct labour 45 Variable overhead 35 Fixed overhead 55 Total $ 225

DC sells Q321 on the Canadian market at a price of $300 per unit after incurring packaging costs of $10 per unit.

DC made $350,000 in profit last year. DC's net operating assets are $3,500,000.

Required:

Problems and issues: Please help me to identify and discuss issues with the company's transfer pricing policy, performance evaluation method, and compensation scheme.