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Question 4 Annex Division of Carlyle Co. Ltd produces electric motors, 25% of which are sold to Crossway Division of Carlyle. The remainder are sold to outside customers. Carlyle treats its divisions as prolit centres and allows division managers to choose their sources of sale and supply. Corporate policy requires that all interdivisional sales and purchases be recorded at variable cost as a transfer price. Annex Division's estimated sales and standard cost data for the year ending 31 December 2003, based on capacity of 50,000 units, are as follows: Variable costs Fixed costs Gross margin Unit sales . Crossway Outsiders $450,000 $4,000,000 ($450,000) ($1,800,000) (S150,000) (600,000) ($150,000) $1,600,000 40,000 10,000 Annex has an opportunity to sell the 10,000 units shown above to an outside customer at a price of $75 per unit. Crossway can purchase its requirements from an outside supplier at a price of $85 per unit. Required a) Assuming that Annex Division desires to maximise its gross margin, should Annex take on the new customer apd drop its sales to Crossway in 2003? Why? (5 marks) b) Assume, instead, that Carlyle permits division managers to negotiate the transfer price for 2003. The managers agree on a tentative transfer price of $75 per unit, to be reduced based on an equal sharing of the additional gross margin to Annex resulting from the sale to Crossway of 10,000 motors at $75 per unit. What would be the actual transfer price for 2003? (3 marks) c) Assume Annex could sell all units to outsiders for $100 per unit. Should Annex do it? Explain. (S marks d) State the general transfer pricing rule. Under the conditiens in (c), what transfer price is (5 marks) suggested by the general rule? (5 marks) e) Assume the conglitions in (c) and a transfer price of $100. Should Crossway buy the motors from Annex or from an outside supplier? Which is better for Carlyle Corporation? (2 marks) (Total marks- 20 marks)