Fabri Division is part of the Multo Group. Fabri Division produces a single product

for which it has an external market which utilizes 70% of its production capacity.

Gini Division, which is also part of the Multo Group requires units of the product

available from Fabri Division which it will then convert and sell to an external cus-

tomer. Gini Division's requirements are equal to 50% of Fabri Division's production

capacity. Gini Division has a potential source of supply from outside the Multo

Group. It is not yet known if this source is willing to supply on the basis of (i) only

supplying

all

of Gini Division's requirements or (ii) supplying any part of Gini

Division's requirements as requested.

(a)

Discuss the transfer pricing method by which Fabri Division should offer to

transfer its product to Gini Division in order that group profit maximization is

likely to follow.

You may illustrate your answer with figures of your choice.

(b)Explain ways in which (i) the degree of divisional autonomy allowed and (ii)

the divisional performance measure in use by Multo Group may affect the

transfer pricing policy of Fabri Division.