Al Saqr is one of the leading companies in smart surveillance cameras operating in Doha. At the beginning of 2020, the director of the company, Mr. Fahd the general director of this company implemented the concept of decentralization, whereby all authorization and responsibilities were delegated to the heads of departments to set transfer prices with the freedom to make decisions related to the inputs and outputs of each department. To evaluate performance, the company considers each division as a profit center where each division head is responsible for the revenues, costs, and profits of his department. Alsaqr Company is divided into two departments: the surveillance camera production division and the camera assembly division. Mr. Fahd called the director of the surveillance camera production department, Mr. Khaled: - Mr. Fahd: Assalam alikum Mr. Khaled. Given the problems that have been arising between your department and the assembly department, I would like to request cost information related to your department in order to find a solution to the dispute over the internal transfer price. As you may know 5,000 units of your department must be transferred to the assembly department during this month. - Mr. Khaled: Walikum Assalam Mr. Fahd. It is true that there is a dispute between me and the head of the assembly department Mr. Nasser. Here is the following requested information: The production department Direct material (Total) 53000$ Direct labor per unit 9.8 Manufacturing overhead per unit 8.4 Total fixed manufacturing overhead cost 26000 Selling price per unit 40 Mr. Fahd contacted Mr. Nasser and collected the following information for the assembly department Camera assembly department Direct material per unit 22.4 Total Direct labor cost 58000 Manufacturing overhead cost per unit 3.7 Fixed cost per unit 1.6 Selling price per unit 120 Mr. Nasser, the head of the assembly department, was invited to a meeting with Mr. Fahd, and the director of the production department, Mr. Khaled where the problem between Mr. Naser and Mr. Khaled was discussed in detail: - Mr. Nasser (explaining his views about the issue): The problem is that in the assembly department, we are used to buy all the cameras from the production department based on the transfer price, which is based on the total cost. However, last month, Mr. Khaled surprisingly decided to increase the internal transfer price to $ 42, which is more than the market price of $ 40, but we cannot afford this higher cost and therefore we prefer to buy cameras from the open market. We consider this increase in price by the production department to be unjustified. - Mr. Khaled: Yes, it is true, and a severe dispute has arisen between us because of this. Anyway, I do like to justify to you, Mr. Fahd that the sudden increase in price is beyond the control of the production department, it is because of the rise in fixed costs resulting from new investments in the advanced equipment. The new investments, which are supposed to improve the quality of the product, have led to an increase in costs and therefore, we increased the internal transfer price. - Mr. Fahd is confused about resolving this dispute because he believes that both departments are right, and therefore he must be fair in the solution without prejudice to the total net income of the company, meaning that he will try to satisfy both parties, but not at the expense of the net income of the company as a whole.

1- First, Mr. Fahd wants to understand (using multiple external sources) the concept of internal transfer price, the types, and the advantages and disadvantages of each type? (2 Marks)

2- Mr. Fahd wants to understand the basis of the problem, and he asked your group to calculate the net income for each section using the pre-dispute transfer prices, which are (a) the market price and (b) the price based on the total cost of 110%. (3 Marks)

3- The first option is that Mr. Fahd assumes that the assembly department will buy the camera from outside at the market price, and therefore the production department will not produce any other product and will not transfer its products to the assembly department. According to Mr. Fahd's concern about the interest of the company as a whole, does this option benefit the company? What is the transfer price that you suggest to Mr. Fahd to introduce for each division, taking into consideration the interests of the departments and the company as a whole? Why?