Climber Ltd. (Climber) is a mountain bike manufacturer located in Port Elizabeth. Climber has two divisions namely Division Wheels and Division Frames. Division Wheels is responsible for manufacturing the mountain bike wheels whereafter the wheels are transferred to Division Frames. Division Wheels has a capacity to manufacture 140 000 wheels per month.

Division Frames is responsible for manufacturing the mountain bike frame and then attaching the wheels in order to obtain a ready for sale mountain bike. Each mountain bike frame requires two wheels. The finished mountain bikes are sold for R19 800 each. Division Frames has a capacity to manufacture 55 000 mountain bikes per month.

Below are the various variable costs:

Division Wheels Variable manufacturing cost per wheel R2 000 Variable selling costs per wheel* R500

Division Frames Variable manufacturing cost per frame R6 000 Variable selling cost per mountain bike R900

*No selling costs per wheels are incurred if the wheels are transferred to Division frames.

There is however also an external market demand for wheels only. The consumers in the market are willing to purchase a wheel for R12 000. It is estimated that 108 000 of Climber wheels can be sold each month in the market.

Additional information - Please note that all amounts/units in the scenario are fictional.

REQUIRED: 2.1. Calculate how many wheels should be transferred to Division Frames per month to maximise the entitys profit. (7 marks)

2.2. Advise on appropriate transferred prices and resulting decisions for the wheels which will achieve divisional agreement. (11 marks)