Question 1 Background HealthBlitz Ltd manufactures and sells hand blenders. The company consists of two Divisions: Motors Division and Final Division. Both of the divisions operate as profit centres and each divisional manager earns a bonus based on divisional profits. Motors Division Motors used in the manufacture of hand blenders are produced in the Motors Division. Motors Division is currently required to meet Final Division's total demand for motors and to sell these motors to Final Division at a transfer price of absorption cost (full cost) plus 40%. Motors Division sells any motors not required by Final Division on the external market at the prevailing market price of 16 per unit. Motors Division has a maximum production capacity of 20,000 units per annum and produces this volume every year. The annual external sales demand for its motors is also 20,000 units. Variable costs of 11 per unit are incurred in the production of each motor. Fixed production overheads incurred by Motors Division amount to 65,000 per annum and are absorbed based on production volume. Final Division Motors sourced from Motors Division, together with a number of other components, are assembled into hand blenders in Final Division. One motor is required in the production of each hand blender. Final Division are compelled by the company's quality assurance regulations to source their entire requirement of motors from Motors Division. In addition to the motor, Final also incurs other variable costs totalling 9 per unit in producing hand blenders. Final Division's fixed production overheads amount to 35,650 per annum. Final Division produce and sell 11,500 hand blenders per annum. They charge a selling price of 33 per hand blender. Requirement (a) Evaluate the current transfer pricing arrangements from the perspectives of each of the divisional managers. 7 marks (b) An external supplier has offered to supply Final Division with motors at a price of 17 per unit and Final Division has approached company management for permission to start sourcing motors externally from this supplier. Discuss the implications of allowing Final Division to source the motors externally, from the perspectives of Final Division and of Healthblitz as a whole (You should support your answer with suitable calculations.) 7 marks