Alki Ltd (Alki) is the only stainless-steel mill in South Africa. However, Alki competes directly with companies that import cheap stainless steel from various overseas stainless-steel mills. Alki has a 31 December financial year-end, makes use of the absorption costing system and values all types of inventory using the first-in-first-out (FIFO) method. Alkis board strives to adhere to the King Code and have sound corporate governance.

Alki wanted to expand and acquired Hasbeeb (Pty) Ltd (Hasb), a stainless-steel countertop and table manufacturer. These countertops and tables are manufactured exclusively from AUSS. Acquiring this company will allow Alki to showcase its high-quality stainless steel to a wider audience.

Alki restructured the company to have two divisions, namely, the Souk Division (SoukD) and the Countertop Division (CountD). These two divisions are managed by independent management teams with direct influence over their respective divisions asset procurement, funding and operational decisions. However, Alki will make use of centralised Information Technology (IT) and Internal Audit Departments. Residual income and return on investment will be used to measure the performance of the Divisions.

SoukD will transfer 40% of their current budgeted AUSS production to CountD and will incur no selling or distribution costs when transferring the required stainless steel. Alkis Chief Executive Officer (CEO) has suggested using a transfer price equal to the variable cost of manufacturing the AUSS. SoukDs management is unhappy about the suggestion and suggested it should be sold to CountD at the selling price that all SoukDs other customers pay. CountDs management is the of view that the division would rather continue purchasing low-quality stainless steel from international suppliers whose selling price is 10% lower than SoukDs selling price. This lower price is because these international suppliers use exploited and child labourers.

Assume the following:

- That the Souks budgeted information for the financial year ending 31 December 2022 will be applicable to SoukD.

Draft a memorandum to the CEO wherein you: Briefly discuss the issues that can potentially arise from the transfer prices suggested by both the CEO and SoukDs management and advise the CEO on an appropriate basis for a transfer price.

(No calculations are required)