Carlo Ltd operates two divisions: the Eli Division and Filo Division. Eli Division currently produce and sell many different products. It is considering the production of a new component X for its internal division: Filo Division only and not for the external market. Filo Division would require an estimated 50,000 units of component X annually from next year. Filo Division will use component X in its production of a new product for the external market next year. The estimated unit costs of manufacturing component X are as follows: Direct materials Direct labour Variable overheads Fixed allocated overheads $28.20 12.20 15.35 9.70 The following are the estimated annual revenue and costs of the two Eli Division products: A and B. for the next year: Product A Product B Revenues $800,000 $480,000 Direct materials 250.800 120.500 Direct labour 155,600 100.120 Variable overheads 198.600 124,380 Fixed allocated overheads 280.000 205.000 Required: (a) If Eli Division has surplus capacity to produce component X for the internal transfer to Filo Division, recommend the minimum transfer price that may be charged by Eli Division. (2 marks) (b) Formulate and explain the transfer pricing formula that will be appropriate for setting the transfer price of component X in the next year, if Eli Division is operating at full capacity and will have to forgo the manufacturing of both products A and B to produce component X next year. (3 marks) (c) Based on the formula in part (b), assuming Eli Division has no surplus capacity, calculate the minimum transfer price that the Eli Division should charge of the total contribution of Products A and B have to be forgone, to enable component X to be produced for the Filo Division. (5 marks) (d) The manager of Eli Division offered to supply component X at full cost plus the division's average markup of 10%. Calculate the transfer price and comment on whether the transfer will take place between Eli and Filo Division. (10 marks) (e) The manager of Filo Division felt that the transfer price at full cost plus a mark- up of 10% is too high and approached a contract manufacturer who was willing to supply component X at $60 per unit. He then negotiated with Eli Division to lower the transfer price to variable costs plus a lump sum of $112,500. Calculate the transfer price and evaluate the proposal. (10 marks) Carlo Ltd operates two divisions: the Eli Division and Filo Division. Eli Division currently produce and sell many different products. It is considering the production of a new component X for its internal division: Filo Division only and not for the external market. Filo Division would require an estimated 50,000 units of component X annually from next year. Filo Division will use component X in its production of a new product for the external market next year. The estimated unit costs of manufacturing component X are as follows: Direct materials Direct labour Variable overheads Fixed allocated overheads $28.20 12.20 15.35 9.70 The following are the estimated annual revenue and costs of the two Eli Division products: A and B. for the next year: Product A Product B Revenues $800,000 $480,000 Direct materials 250.800 120.500 Direct labour 155,600 100.120 Variable overheads 198.600 124,380 Fixed allocated overheads 280.000 205.000 Required: (a) If Eli Division has surplus capacity to produce component X for the internal transfer to Filo Division, recommend the minimum transfer price that may be charged by Eli Division. (2 marks) (b) Formulate and explain the transfer pricing formula that will be appropriate for setting the transfer price of component X in the next year, if Eli Division is operating at full capacity and will have to forgo the manufacturing of both products A and B to produce component X next year. (3 marks) (c) Based on the formula in part (b), assuming Eli Division has no surplus capacity, calculate the minimum transfer price that the Eli Division should charge of the total contribution of Products A and B have to be forgone, to enable component X to be produced for the Filo Division. (5 marks) (d) The manager of Eli Division offered to supply component X at full cost plus the division's average markup of 10%. Calculate the transfer price and comment on whether the transfer will take place between Eli and Filo Division. (10 marks) (e) The manager of Filo Division felt that the transfer price at full cost plus a mark- up of 10% is too high and approached a contract manufacturer who was willing to supply component X at $60 per unit. He then negotiated with Eli Division to lower the transfer price to variable costs plus a lump sum of $112,500. Calculate the transfer price and evaluate the proposal. (10 marks)