Clarendon Manufacturers Limited manufactures and sells standing fans and has two divisions, Hanover and Manchester. Currently, the Manchester Division buys apart from the Hanover Division for $410. The Hanover Division wants to increase the price of the part it sells to the Manchester Division to $500, which is the price it charges customers outside the group. The cost data for the Hanover Division is as follows:

Direct materials	$127.50
Direct labour	$162.50
Variable overhead	$112.50
Fixed overhead	$48

Required:

Explain and calculate the transfer prices at which the Hanover Division should offer to transfer the part to the Manchester Division in order that the group profit-maximizing decisions may be taken on financial grounds in each of the following independent situations:

1. Hanover Division has an external market for its entire product.

2. Hanover Division has excess capacity to supply all parts needed by the Manchester Division.

3. Hanover Division has excess capacity for only 3,000 of the total 10,000 parts needed by the Manchester Division. However, the Hanover Division has an alternative use for this excess capacity which equates to a contribution of $25 for each part.

4. Explain two objectives of transfer pricing systems

5. Discuss briefly three (3) benefits to management of establishing responsibility centres.