Page 3 Intermediate Management Accounting Question 3 (6 marks) Hutchison Company (Hutchison) manufactures sports equipment and has several divisions, all operating profit centres. Hutchison uses a cost-based transfer pricing policy with a 20% markup on full product cost. Division A is considering going outside of Hutchison to buy materials instead of purchasing the materials from Division B, as the market price of the materials has dropped from the long-run equilibrium price of $210 to $175 due to a temporary increase in supply. Despite the independence and autonomy of each division, Hutchison encourages divisions to collaborate and work together whenever possible. Information for Division A and Division B follows: Outside price for materials $175 Division A's annual purchases 20,000 units Division A's selling price of finished product $500 Division A's variable costs (excluding materials from Division B) per unit $125 $3,000,000 Division B's variable cost per unit $130 Division B's fixed costs $1,500,000 Division B's production capacity 50,000 units Division B's capacity utilization 100% Division A's fixed costs Required: a) Assume that Division B can sell any remaining products (NOT purchased by Division A) in the outside market at a price of $175 per unit. Calculate Hutchison's operating income generated from each of Divisions A and B using its cost-based transfer pricing policy. (3 marks) b) Calculate Hutchison's operating income generated from each of Divisions A and B using a market-based transfer pricing policy. (2 marks) c) Determine the optimum transfer price that Division B should charge Division A. (1 mark)