Australian Forestry Ltd has a Raw Timber Division and a Finished Timber Division. The variable costs for each division are:

• Raw Timber Division: $3.30 per metre of raw timber.
• Finished Timber Division: $4.12* per metre of finished timber.

* Does not include cost of raw timber.

Raw timber can be sold to external customers for $6.60 per metre. Finished timber can be sold at $11.50 per metre.

Required:

1. If transfer prices are set through negotiation, identify the likely price range of these discussions. Is this technique an appropriate technique for establishing transfer prices?
2. Identify the transfer price and divisional contribution margin per metre of timber if transfer prices are set using:
   1. The general transfer price rule (the raw timber division does not have any spare capacity).
   2. The general transfer price rule (the raw timber division has spare capacity).
   3. Cost-plus pricing with a 25% mark-up on variable cost.
3. Assume that the raw timber division has spare capacity and currently the transfer price for timber is set using cost-plus pricing with a 25% mark-up on variable cost. If the finished timber department was approach by an external supplier to supply raw timber for $90 per metre, would the price be accepted by the divisional manager? Would accepting this price be in the best interest of the firm as a whole?