i)

Question 3

A division is considering investing in capital equipment costing 1.5m. The useful economic life of the equipment is expected to be 30 years, with no resale value at the end of the period. The forecast return on the initial investment is 20 per cent per annum before depreciation. The divisions cost of capital is 13 per cent.

Required:

c) In no more than 300 words, explain why setting transfer prices using cost plus pricing is unlikely to maximise group profits.