Gladwell PLC is a large manufacturing company with divisional performance assessed on the basis of profitability. Division North of this company produces a single product. Although there is an external market for this product, currently 100% of the output is transferred within the company to Division South which incorporates this product into another product which is sold externally. Both divisions are currently operating significantly below full capacity. Division North's Costs per unit of product are (based on current total output): s Direct Materials 500 Direct Labour 500 Manufacturing Overhead 1,700 Total Cost 2,700 Manufacturing overhead includes a fixed element absorbed at a rate of 100% of direct labour cost with the remaining part being variable overhead. Division North's transfer price for sales to South is 2,800 per unit. To produce the final product, Division South incurs further direct costs of 700 per unit and overhead of 1,000 per unit (50% of this figure is the fixed overhead per unit at current output level and the remainder is variable overhead). Division South's management want to review the transfer price. Both divisions are concerned with maximising profits and Division South argues that a transfer price of 2,300 would be good for total profits of the company. Estimated demand for the final product produced by Division South is shown below: Division South Price Demand (units) 5,000 1,600 6,000 850 7,500 400 Required: i. Calculate the contribution of both divisions and of the company overall both in the current situation and using the new transfer price proposed by Division South ii. Is the total profit for the company changed with the new transfer price? Explain the problem being caused by the transfer pricing system in this specific situation. Briefly discuss whether it is advisable for central management to act to reduce such problems arising from transfer pricing systems