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Question 4 The Doran Company Ltd is a manufacturing division of electrical components within the Goodman Group and it has presented the following summarized budget for the forthcoming year: Sales Variable costs at 5 per unit Total Contribution Less: Fixed Costs (excluding interest) Divisional operating profit 375,000 (250.000 125,000 (50,000) 75,000 Included in Dorans budget above is the proposed sale of 10,000 units at 7 each to Sharp Company, another division in the Goodman Group. (There are no tax or tariff implications on this proposed internal transaction). However, this is only a proposed transaction and there are no legal agreements involved. In recent days, a firm external to the group, i.e. an independent manufacturing contractor, has promised to supply Sharp Company with the same number of electrical components at 6 each. Under the decentralized corporate structure, the managers of both Doran and Sharp have been given freedom to make decisions regarding selling prices and trading customers. Requirements: a) Calculate the impact on the total profit of (a) the Doran division, (b) the Sharp division and (c) the Goodman Group if Doran meets the 6 price and supplies Sharp with 10,000 units. b) Calculate the impact on the total profit of (a) the Doran division, (b) the Sharp division and (c) the Goodman Group if Doran does not lower its price and Sharp purchases the 10,000 units externally. In other words, the proposed internal transaction will not go ahead. Assume, for various technical reasons it is not possible for Doran to acquire another customer for the 10,000 units during the current accounting period, therefore the goods will not be produced. c) Comment on the implications of your calculations but ignore all taxation considerations. d) Explain and discuss three characteristics of a good transfer pricing system