Plastics Chemical Company Inc. (PCCI) is a small chemical company whose primary product is polyvinyl chloride, commonly referred to as PVC. PCCI is a vertically integrated company that produces a number of PVC-based products. It has three divisions: . Petroleum (extracts the petroleum) . PVC Compound (turns the petroleum into PVC) . Siding (uses the PVC to manufacture vinyl siding) Over the last five years, the company has implemented a policy of decentralization. Each division manager was given complete autonomy to operate the division as an independent company. To further entrench this policy, each manager is evaluated on divisional profits and is paid a substantial bonus that is almost entirely based on the degree of profitability of the division. Upper management views the policy of decentralization as a key factor in the company's success. PCCI's transfer-pricing policy is to charge buying divisions the full standard cost plus a 10% profit margin. The 10% profit margin is generally considered to be substantially below normal profit margins within the industry The manager of the Siding Division is disputing the transfer price from the PVC Compound Division. According to her, the transfer price of $28.38 that the Siding Division has to pay for its raw materials is unacceptable, because these materials can be purchased externally for $22. Purchasing internally drives up the product cost of siding to $49.88 per square. Current wholesale selling prices for siding are between $48 and $50 per square, so it is difficult for the Siding Division to be competitive at that cost If the internal transfer price between the PVC Compound Division and the Siding Division were reduced to $22 from $28.38, a dispute would no doubt arise between the PVC Compound Division and its primary source of materials, the Petroleum Division. PCCI also has an opportunity to sell 5,000 squares of siding at a special-order price of $35 per square. The sale would not affect current sales and there is sufficient excess capacity to handle the order. However, based on the $49.88 cost provided by the Siding Division, PCCI was planning to turn down the order. PCCI's president, has asked you to confirm this decision. He has provided the standard cost data per square of siding below. Plastics Chemical Company Inc. Standard cost data per square of siding (Note 1) Petroleum PVC Siding Division Division Division Raw materials $3.60 $12. 10 $28.38 Conversion materials 2.00 3.50 4.25 Utilities (Note 1) 0.50 2.10 1.35 Packaging (Note 1) 0.90 1.55 Distribution (Note 1) 1.80 3.20 2.85 Direct labour (Note 2) 0.80 1.40 6.00 Depreciation 1.90 1.90 2.50 Overhead (Note 3) 0.40 0.70 3.00 Total product costs 11.00 25.80 49.88 8:30 PM 8 ENG e o 9/7/2021Total product costs 11.00 25.80 49.88 Profit margin 1.10 2.58 Internal transfer price $12 10 $28.38 Note 1. A square of siding is approximately 100 square feet. Note 2. In the Petroleum Division, the direct labour is paid on an hourly basis and it is common practice to lay off employees when necessary. In the PVC Compound Division, the employees require significant skills and training, and thus layoffs are not implemented, even during recessionary periods. In the Siding Division, approximately one-third of the direct labour is supervisory and is maintained regardless of the level of activity in the manufacturing plants. Note 3. It is company policy to charge manufacturing overhead on the basis of direct labour dollars. Required: a. Determine whether it would be advantageous for the company as a whole to accept the special order. (12 marks) b. Discuss the pros and cons of the current full-cost plus market transfer-pricing policy. (4 marks) c. Identify three alternative transfer-pricing policies. (3 marks) d. Based on your analysis, provide an overall recommendation to PCCI's president