P12.36 Transfer pricing; negotiation; management incontives: manufactur Silver Fern Technology Lid (SFTL) has two divisions: North Island and South Island. South Island LO 12.14 12.12 currently sells a diode reducer to manufacturers of aircraft navigation systems for $2325 per unit 12.13 Variable costs amount to $1500, and demand for this product currently exceeds the division's ability to supply the marketplace. Despile this situation, SFTL's head office management is considering another use for the diode reducer, namely. integration into a satellite positioning system that would be manufactured by the North Island Division. The positioning system has an anticipated selling price of $4 200 and requires an additional $2010 of variable manufacturing costs. A transfer price of $2 250 has boon established for the diode reducer. Head office management is anxious to introduce the new positioning system. However, unless the transfer is made, this will not be possible because of the difficulty of obtaining the needed diode reducers Irom the extemal market. Both divisions are in the process of recovering fromfinancial problems, and neither division can afford any further losses. The company uses return on Investment (ROD) to measure divisional performance and awards bonuses to divisional management based on their division's performance. Required 1. How might South Island's divisional manager react to the decision to transfer diode reducers to North Island? Show calculations to support your answer 2. How might North Island's divisional management react to the $2250 transfer price? Show calculations to support your answer. 3. Assume that a lower transfer price is desired. Should head office management lower the price or should the price be lowered by another means? Explain. 4. From a contribution margin perspective, does SPTL benefit more if it sells the diode reducers externally or transfers the reducers to North Island? By how much