Emperor Limited manufactures a wide range of mountain bikes and accessories. It has two

divisions in its manufacturing plant: the Seat Division and the Assembly Division. The Seat

Division manufactures bicycle seats at a variable cost of RM75.00. It can sell the seats for

RM125.00 on the external market.

The final assembly of the bicycles takes place in the Assembly Division, where an additional

RM650.00 of variable costs are incurred before adding the cost of a seat. The bicycles are

then sold for RM1,200.00. The Assembly Division can purchase the seats from the external

market for RM115.00.

Required:

Discuss the transfer prices at which the Seat Division should offer to transfer the bicycle seat

to the Assembly Division in each of the following situations:

a. The Seat Division has enough capacity to meet the demand from the Assembly Division's

for the bicycle seats. Determine the minimum and maximum transfer price that should be

charged.

b. Assume that the Seat Division is operating at capacity and will have to forgo outside sales

to meet the demand from the Assembly Division. Determine the transfer price and advise

the management on whether to purchase internally or purchase the seats from the external

market.

c. For each of the under-noted transfer pricing methods below, state one (1) market condition

appropriate for their adoption and state one (1) of their limitation:

Market-based transfer prices.

Full-cost based transfer prices.

Negotiated transfer prices

d. State two (2) social and economic issues of transfer pricing practices.