P15-12 Transfer pricing, divisional performance lane allowed: 4S minutes Division A, which is part of the ACF Group, manufactures only one type of product, a Bit, which it sells to external customers and also to division C, another member of the group ACF Group's policy is that divisions have the freedom to set transfer prices and choose their suppliers Chapter 15 Pricing and intra-company transfers 649 The ACF Group uses residual income (RI) to assess divisional performance and each year it sets each divislon a target RI. The group's cost of capital is 12% a year. Division A Budgeted information foe the coming year is Maximum capacity Extenal sales External selling price vaniable cost Flwed costs Capital employed Target residual income 150,000 Bits 110,000 Bits E35 per Bit 22 per Bit E1,080,000 3,200,000 180,000 Division C Division C has found two other companies wlling to supply Bits X could supply at C28 per Bit, but only for annual orders in excess of 50,000 Bits. Z coukd supply at 33 per Bit for any quantity ordered. Required Notr: Ignore tax for parts a and b) I Division C peovisionally requests a quotation for 60,000 Bits from division A for the coming year Calculate the transfer pelce per Bit that division A should quote in order to meet Its residual income target Calculate the two peices division A would have to quote to divislon C, if it became group policy to quote transfer prices based on opportunity costs (a) (b) 2 Evaluate and discuss the impact of the group's current and proposed policies on the prolits of divisions A and C, and on group profit. llustrate your answer with calculations 3 Assume that divisions A and C are based in different countries and consequently pay taxes at different rates: division A at 55% and division C at 25%. Division A has now quoted a transfer price of 30 per Bit for 60,000 BitsCalculate vehether it is better tor the group il division C puchases 60,000 Bits from divi- ston A or from supplier X