Case Study:

Expensive Allen Sawyers Technologies Limited (VAST) has two divisions: North Dakota and South Dakota. The South Dakota division currently sells a special bipolar transistor to manufacturers of electric cars for $2,400 per unit. The variable costs per unit are $1,500, and external demand currently exceeds the South Dakota division's production capacity.

VAST's management is considering a different use for the special bipolar transistor, namely, integration into a satellite positioning system (SPS) that would be manufactured by the North Dakota division. The SPS has an expected market price of $4,550 and requires an additional $2,300 of variable manufacturing costs per unit. These variable costs are estimated to decline each year after introducing the SPS to the market. The North Dakota division requests that each unit of the transistor is transferred at a maximum price of $2,250 (i.e., South Dakota variable cost plus 50% mark-up).

The management of VAST is anxious to introduce the new SPS. However, unless the transfer between divisions is made, this will not be possible because of the difficulty of obtaining the special transistors from the external market.

VAST uses return on investment (ROI) to measure divisional performance and awards bonuses to divisional managers (DMs) based on their division's performance. This practice has, in the past, seen DMs protect the financial interest of their divisions rather than furthering the Group's overall financial performance.

The tension between the DMs is a concern for the Group General Manager (GGM),Laura Sawyers who needs support from the managers to enable her to deliver on the Group's targets.Laura has been under pressure from VAST's Board to ensure that the company achieves a long-term return to shareholders that is comparable to their industry average. Unfortunately, VAST's 5-year average total return to shareholders (TRS) has yet to reach the industry benchmark of 10% that shareholders anticipate receiving.

The North Dakota DM in a recent meeting voiced their frustration: "how on earth are we going to meet our TRS target given the current negative economic outlook?"

Laura exclaims: "our competitors are also affected by the same negative economic outlook. So, I don't think our shareholders demand is unreasonable. We simply need to learn how to work as a team and not as independent companies!"

The South Dakota DM responds: "my concern is the fact that nobody here has been able to explain to me what this TRS really measures?"

Laura believes that the proposed SPS would deliver significant value to the company and help them achieve the anticipated TRS target. However, she is worried that the lack of cooperation between DMs will mean they will not be able to introduce the SPS to the market.

Laura has hired you, as a management accounting consultant, to review VAST's transfer pricing and divisional performance measurement systems, as well as help managers understand how TRS is determined. To help, Laura has provided the information in Table 1 regardingVAST's share price and dividends for the last five financial periods.

Table 1. Share price and dividend information	2021	2020	2019	2018	2017
Number of ordinary shares in issue (in million)	53.00	52.75	50.13	47.00	45.00
Share price (31 December)	21.00	26.25	19.90	16.30	19.32
Share price (01 January)	26.25	19.90	16.30	19.50	18.01
Dividends earned (in cents):	36	30	32	59	55

Questions

1. How to explain how the South Dakota's divisional manager would react to the North Dakota's proposed transfer price of $2250, with calculations and theoretical support in the answer too.

2. How to explain how the North Dakota's divisional manager would justify their proposed transfer price of $2250, with calculations to support this answer