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11. Transfer Prices Decision - Opportunity Costs vs Spare Capacity - Different scenarios NOS A large Business Consultancy Firm is organized in to several divisions. One of the divisions is the information Technology) Division, which provides consultancy services to its Clients as well as to the other Divisions of the Firm. The Consultants in the IT Division always work in a team of 3 Professional Consultants on each day of consulting assignment The External Clients are charged a fee at the rate of ? 4,500 for each consulting day. The fee represents the cost plus 150% profit mark-up. The break up of cost involved in the Consultancy Fee is estimated at 80% as being variable and the balance is fixed. The Textile Division of the Consultancy Firm which has undertaken a big assignment requires the services of two teams of Consultants to work 5 days in a week for a period of 48 weeks. While the Director of the Textiles Division intends to negotiate the Transfer Price for the consultancy work, the Director of IT Division proposes to charge the Textiles Division at 2 4,500 per consulting day. In respect of the consulting work of the Textile Division, IT Division will be able to reduce the variable costs by 200 per consulting day. This is possible in all cases of internal consultations because of the use of specialized equipment. You are required to explain the implications and set transfer prices per consulting day at which the IT Division can provide consultancy services to the Textiles Division, such that the profit of the Business Consultancy Firm as a whole is maximized in each of the following scenarios: 1. Every Team of the IT Division is fully engaged during the 48 week period in providing consultancy services to external Clients and that the IT Division has no spare capacity of Consultancy Teams to take up the Textiles Division assignment 2. IT Division will be able to spare only one team of Consultants to provide services to the Textiles Division during the 48 week period and all other teams are fully engaged in providing services to External Clients. 3. A new External Client has come forward to pay IT Division a total fee of 15,84,000 for engaging the services of two teams of Consultants during the aforesaid period of 48 weeks