Benfei Group has two divisions: Division C manufactures computer chips and Division A assembles computers. The performance-related bonuses of the divisional managers are based on the return on investment (ROI) of their respective divisions. Further information about the divisions is as follows: Division A Assembly A key component in the computer sold by Benfei Group is the Type S chip. This chip is easy to purchase on the open market, but the division currently buys all the 640,000 Type S chips it needs each year internally from Division C for 75 per chip. The manager has just been informed that the price charged by Division C will increase to 115 per chip. In light of this, the manager of Division A has identified a supplier willing to supply an equivalent chip for 75 per unit. However, the manager has been told by the Chief Executive of Benfei Group that Division A must buy the chips internally. Division C Chip manufacturing Following recent cost increases, the full absorption cost of the Type S chip is 90. This includes 27 for fixed production overheads. The Type S is one of many chips produced by the division for a range of customers. The manager of Division C is aware of the competitive external market and he knows that it would be difficult for him to increase prices to external customers for any of its products. He is also aware that these cost increases will reduce the divisions ROI. Therefore, to maintain ROI and protect his bonus, he is seeking to pass on these cost increases to Division A through internal sales. Required: (a) Assuming that, in the short term, Division A must purchase its chips internally, for 115 per chip, instead of from an external supplier, calculate the impact of this policy on the annual profits of each of the two divisions and of Benfei Group as a whole. [8 marks] Division C has recently developed a new chip (Type X) which it sells exclusively to external customers. Increasing production of this Type X chip will utilise the spare capacity of the division and will earn the division a contribution of 2.20 per machine hour. The demand is so high for these Type X chips that their production could also use 1,570,000 machine hours that are currently used to make 157,000 of the Type S chips that are transferred to Division A. Required: (b) Explain, with supporting calculations, the maximum and minimum transfer price for the Type S chip that would be acceptable to both divisions, given Head Offices instructions and the information about the new Type X chip. [9 marks] (c) Discuss briefly whether standard costs or actual costs should be used as the basis for costbased transfer prices. [8 marks] [Total 25 marks]