Cable & Wireless Inc. a multidivisional telecommunications corporation has two completely independent profit centers considering a transfer. Cable & Wireless Inc.subsidiaries operate within a decentralized environment. Cable & Wireless Inc.will not dictate transfers or impose a transfer pricing policy on the divisions. They must be free to decide whether they should transfer, and if so, they must negotiate a transfer price. Further, the Cable & Wireless Inc.reward system must be based on the total divisional profits reported by the profit centers.

One of Cable & Wireless Inc. divisions; Lime Dominica, produces telephone sets that it sells for $30 each. The standard absorptive manufacturing cost is $24, which includes $6 per unit in fixed overhead. The fixed overhead is allocated over its annual sales forecast of 50,000 telephone sets its maximum production capacity is 75,000, sets annually.

Another division, Lime Barbados, can use the telephone sets in an answering machine-telephone-radio product it markets As an alternative to buying telephone sets from Lime Dominica, Lime Barbadoscan enter into a contract for the 20,000 sets needed from a Trinidadian company, Rogers Inc. Rogers Inc. has quoted a price of $25 per set for the same quality telephone.

Required

Consider the following independent situations

a. Determine whether a transfer should take place between Lime Dominica and Lime Barbados and the minimum and maximum transfer prices.[5 marks]

b. Assume that Lime Barbados wants its name imprinted on the telephone set. Its Trinidadian supplier has quoted a price of $31.00 per set. Lime Dominica will have to buy a stamping machine at a net cost of $20,000.

Determine whether there should now be a transfer.

What transfer price will result in the managers benefiting equally from the transfer?

Determine the operating income for both divisions using the transfer price calculated

[7 marks]

c. As an alternative to the two previous positions, the Lime Barbados marketing staff has decided against imprinting its name on the phone. However, they believe that if the color is changed to fuchsia, 30,000 specialty phone-answering machine-radios can be sold in the Caribbean. The Trinidadian supplier has quoted a price of $26.50 for an order of this size due to the higher cost of fuchsia. Lime Dominica already produces fuchsia-colored phones for its local market and will incur no extra costs in changing the color.Calculate whether this transfer should occur. If so, what transfer price will share the differential profits equally between the two managers?[7 marks]

d. Compare and contrast each of the three methods used to determine a transfer price. [6 marks]

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