HPR harvests, processes and roasts coffee beans. The company has two divisions:

Division P is located in Country Y. It harvests and processes coffee beans. The processed coffee beans are sold to Division R and external customers.

Division R is located in Country Z. It roasts processed coffee beans and then sells them to external customers.

Countries Y and Z use the same currency but have different taxation rates. The budgeted information for the next year is as follows:

Division P

Capacity 1,000 tonnes

External demand for processed coffee beans 800 tonnes

Demand from Division R for processed coffee beans 625 tonnes

External market selling price for processed coffee beans $11,000 per tonne

Variable costs $7,000 per tonne

Annual fixed costs $1,500,000

Division R

Sales of roasted coffee beans 500 tonnes

Market selling price for roasted coffee beans $20,000 per tonne

The production of 1 tonne of roasted coffee beans requires an input of 1.25 tonnes of processed coffee beans. The cost of roasting is $2,000 per tonne of input plus annual fixed costs of $1,000,000.

Transfer Pricing Policy of HPR

Division P must satisfy the demand from Division R for processed coffee beans before selling any to external customers.

The transfer price for the processed coffee beans is variable cost plus 10% per tonne.

Taxation

The rate of taxation on company profits is 45% in Country Y and 25% in Country Z.\

Required

Explain TWO behavioural issues that could arise as a result of the head office of HPR imposing transfer prices instead of allowing the divisional managers to set the prices.