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Page 3 of 8 QUESTION 2 The Philadelphia Company has two divisions, A and B. For one of the companys products division A produces a major sub-assembly and division B incorporates this sub- assembly into the final product. There is a market for both the sub-assembly and the final product, and the divisions have been delegated profit responsibility. The transfer price for the sub-assembly has been set at long-run average market price. The following data are available to each division: Estimated selling price for the final product Long-run average selling price for intermediate product Outlay cost for completion in division B Outlay cost in division A 300 200 150 The manager of division B has made the following calculation; leato10 Selling price- final product Transferred-in cost (market) Outlay cost for completion 300 200 150 Quly ost y 350 S(50) Reguired (a) Should transfers be made to divisio n B if there is no excess capacity in division and (7 marks) (b) Assume that division A's maximum capacity for this product is 1,000 units per month with sales to the intermediate market presently 800 units, and A is not considering cutting the price to outsiders regardless of the presence of idle capacity Should 200 units be transferred to division B and if so, at what price? (5 marks) if so, at what transfer price? Please state your reason(s) Suppose A quoted a transfer price of $150. What will be the contribution to the firm as a whole if the transfers were made? As manager of B, would you be inclined to (5 marks) (c) buy at $150? (d) The manager of division A has the option of i. Cutting the external price to $195 with the certainty that external sales will rise to 1000 units; ii. Maintaining the outside price of $200 for the 800 units, and transferred the 200 units to B at a price that would produce the same total contribution for A. State the minimum transfer price that should be used, and demonstrate whether it (8 marks) leads to the most desirable decision for the company as a whole