Gratiano Division is part of the Ericus Group. It produces a basic fabric which is then converted in other divisions within the group. The fabric is also produced in other divisions within the Ericus Group and a limited quantity can be purchased from outside the group. The fabric is currently charged out by Gratiano Division at total actual cost plus 20% profit mark-up.

Examine why the current transfer pricing method used by Gratiano Division is unlikely to lead to:

(i) maximization of group profit and

(ii) effective divisional performance measurement.

Ericus Group is considering the implementation of a single performance measure - Return on Capital Employed (ROCE) for all its divisions.

Critically discuss why ROCE only might not be an adequate measure of performance for Ericus Group.