PART A: Transfer Pricing and Variances

Gamma Company produces cars. Two of the profit centers, Tires center and Assembly center, were in conflict over the price of tires. External suppliers of tires offered Rania, the manager of the Assembly center, the same type and quality of tire for $200. Rania used to buy these tires internally for $300 each.

Jamil the CEO of the company called for a meeting with the managers of both centers in order to solve the issue. Kamil the manager of the Tires Centre explained that:

The tires we produce have been a trusted brand for over 60 years and are distributed by Gamma Company to members all over the globe.Our tires have long been recognized as a leading private brand since 1954.

Tires Center: Cost per tire

	$
Direct materials	95
Direct labor	54
Variable overheads	25
Fixed overheads	36
Total cost	210

Rania answered that the external suppliers offered the same specifications and quality for a $100 less, and that she should be able to buy them internally at least at the same price.

Required:

1. Advise and justify whether the Assembly Centre should to buy tires from inside or outside the firm.(130 words)
2. Based on your answer in the previous requirement, provide and justify a proper transfer price.(130 words)

3. The Tires Centre had a capacity of 40,000 tires per year, and the Assembly Centre use around 90,000 tires per year. The Tires center could sell all of its production externally for $300. Based on these special circumstances provide a recommendation for Gamma Company whether these two centers should buy/sell internally or externally. Justify your answer.(50 words)
4. Explain why setting transfer prices by Gamma can be controversial when a product is being transferred between two profit centers.(130 words)