ABC Ltd. manufactures bicycles. Various divisions make components and transfer them to the Mountain division for assembly into final products. The Mountain division can also purchase components from external suppliers. Each bicycle requires two wheels. The Wheel division manufactures the wheels, and it also sells wheels to external customers. All divisions are profit centres. Prices and costs for the Mountain and Wheel divisions are as follows: Mountain division Selling price to external customers per bicycle Cost for wheels per bicycle from external supplier Other variable costs per bicycle Total fixed costs Capacity per annum $240 $25 $60 $900,000 8,000 bicycles $15 Wheel division Selling price to external customers per wheel Variable costs per wheel Total fixed costs Capacity per annum $8 $256,000 64,000 wheels Required: (a) Assume that Wheel division is producing at 70% of its capacity and can sell all that it produces to external customers. If the managers are free to negotiate and make decisions on their own, will a transfer take place? If so, within what range will the transfer price fall? Explain. (4 marks) (b) Assume that ABC Ltd. has a cost-plus transfer price policy of full absorption cost plus 10% and Wheel division is producing at 95% of its capacity and can sell all that it produces to external customers. (i) What will be the transfer price per wheel? (ii) What will be the effect on the profit of the company as a whole? (8 marks) (c) Discuss the general rule for transfer pricing and use it to assess alternative transfer prices based on variable costs, market prices and full costs. (4 marks) (Total for Question 3: 16 marks)