Malabar Limited manufactured stoves in Jamaica. The entity has two divisions: the assembly division and the parts division. The parts division makes a special burner that the entity uses in a special counter top stove, the laser burner. The manager of the parts division believes that is given the opportunity the parts could be sold to Wetmore Stoves and Supply Limited for $130. However, the financial controller of the Assembly division thinks that these burners could be bought externally for $110 per unit. The assembly division is a profit centre. The assembly division purchases the parts from the parts division, assembles and sells to numerous local stores in the island. However, the financial controller believes that given the autonomy, the divisions profit margin could increase by at least 15% if all the burners are bought externally. The stoves are currently sold at $500 per stove. The assembly division has a market to sell 100,000 stoves annually and purchases the burner from the parts division for $118 per unit. The assembly division thinks it can source all 100,000 units of burners externally. On the other hand, the parts division is a cost centre. The parts division manufactures the parts to be supplied to the assembly division. However, its manager thinks that if given the freedom to sell externally, goal congruence could be maintained. The division has the capacity to produce 110,000 burners annually, but the assembly division has the capacity to buy only 100,000 annually. The manager thinks the special burners are unique; therefore, he should be given the opportunity to maximize its profits. Malabars chief financial officer (CFO) gave directives to sell internally. The CFO in a meeting last year indicated that, to maintain the competiveness of the company, the burners should be sold to the assembly division in order to maintain its competitive advantage. That is, the companys main competitor, Discount Electrical and Supplies Limited has 47% of the market share and had just introduced a new seven burner low cost stove. The CFO also thinks that if the excess (10,000) is sold externally, it would affect the performance of the assembly division adversely since it might be "selling to the enemy" (competitors). The following per unit information relates to the burners and the stove: Burners Stove Direct Material $25 $150 Direct Labour $35 $60 Direct expenses $10 $10 Variable selling expense $5 $15 Variable overheads $15 $40 Fixed overheads $18 $30 Fixed selling expenses $12 $20 Total cost $120 $325 Note: the total cost of the stove is exclusive of the special burner that is to be bought from the parts division. The fixed cost per unit above is incremental and can be avoided if the burners or the stoves are not produced or sold.

Required: a. Prepare income statements for the individual divisions and the company as a whole assuming the intermediate product is sold internally, only. (7.5 marks)

b. Prepare income statements for the individual divisions and the company in total assuming both managers are given autonomy to make decisions in the best interest of their divisions as well as the company in total. (7.5 mark)

c. Prepare income statements assuming the intermediate product is sold internally and the excess 10,000 units are sold externally. (8 mark)

d. Which decision maximizes profits, explain? (1marks) e. What is a transfer price? (1 mark)

(Note: You should prepare income statements in columnar format using marginal costing, for requirements (a) to (c) clearly showing in separate columns the figures for each requirement).undefined