Innovative Products has many divisions. One of its divisions, Retail, deals with buying finished goods from other divisions of the company and, after some additional work, sells these goods to external customers. One of the products that it sells is purchased from the Motor division of the company. The Motor division produces this product according to Retail division specifications and cannot directly sell to external customers. The company practices divisional autonomy. The division manager decides on the units to be purchased and the selling price of the products. It is always done in the best interest of the division rather than the company. For the coming year, the Retail division estimated the units of the Motor division product that it expects to be able to sell at various prices as follows:

Price ($) (after additional work)Units sold

502,000

404,000

356,000

308,000

2510,000

2012,000

The Motor division quotation to Retail division provides the following:

Direct materials$ 2

Direct labour 4

Factory overhead (150% of direct labour costs)6

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Total factory cost 12

Profit margin (33 on factory cost)4

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Quoted price $16

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One-third of the factory overhead cost is variable. Retail division's additional work done on the product costs $4. Maximum demand for the product is 12,000 units and both divisions have the capacity to fulfil the demand.

Required:

a)For each division and the company as a whole, determine the level of units sold that will maximise their profitability.

b)Using the general transfer pricing rule:

i)Determine the minimum transfer price that can be charged by the Motor division.

ii)Assuming that the number of units to be produced is determined in the best interest of the company and the Retail division can source the product from an external supplier at $14 per unit. Calculate a negotiated transfer price if both division shares equally the difference between the minimum and maximum transfer price.

iii)Assuming that the Motor division has capacity to produce only 50% of the number of units as determined in the best interest of the company. The division can only fulfil the remaining 50% by sacrificing its current production. For every additional unit it decides to produce, it will lose $3 of contribution margin from its existing production. Calculate the new transfer price that will be charged by the Motor division. Is this proposition in the best interest of the company?