Management Accounting- create value

Case Study Material: A division of GE Ltd produces a component used in the assembly of wind turbines. They are currently operating at 85% of their 1,000 unit capacity. The divisions manufacturing costs and variable selling expenses related to the component are as follows: Cost per unit Direct materials $500 Direct labour 75 Variable manufacturing overhead 100 Fixed manufacturing overhead (at current production level) 150 Variable selling expenses (only incurred on sales to outside customers) 80 A different division of GE is just beginning to get into the turbine assembly business and is interested in purchasing the component in-house rather than buying it from an outside supplier. They currently need 200 units. The production division has sufficient excess capacity with which to make the extra components. Because of competition, the market price for this component is $1,000 regardless of whether the component is produced by GE or another firm. Source: Adapted from Braun, K. W., & Tietz, W. M. (2015). Managerial accounting (Global 4th ed.) (p. 606). London, UK: Pearson Education Limited. Questions: 1. Briefly explain why divisionalised organisations have transfer pricing systems. 2. Determine the maximum acceptable transfer price and explain why this is the maximum acceptable transfer price. 3. Compute the minimum acceptable transfer price, assuming transfer prices are set using the general transfer pricing rule. 4. Explain, with reference to GE, the significance of spare capacity in a supplying unit, when transfer prices are set using the general transfer pricing rule.