Question 1: Performance Reporting and Transfer Pricing (18 marks) Spectrum Limited, a cellular communication company, has multiple business units, organised as divisions. Each division's management is compensated based on the division's operating income. The company's Electrical Division produces a variety of electrical items, including a B2B electrical fitting. The Electrical Division (which is operating at capacity) sells this fitting to its regular customers for $7.80 each; the fitting has a variable manufacturing cost of $4.35. The company's Circuit Division has asked the Electrical Division to supply it with a large quantity of B2B fittings for only $5.80 each. The Circuit Division, which is operating at 50% of capacity, will put the fitting into a Circuit unit that it will produce and sell to a large mobile network company. The cost of the Circuit unit being built by the Circuit Division follows: Purchased parts (from outside vendors) Electrical fitting B2B Other variable costs Fixed overhead and administration Total cost per Circuit unit $ 22.60 5.80 14.10 8.10 $50.60 Although the $5.80 price for the B2B fitting represents a substantial discount from the regular $7.80 price, the manager of the Circuit Division believes the price concession is necessary if his division is to get the contract for the mobile network company. He has informally learned that the mobile network company plans to reject his bid if it is more than $52 per Circuit unit. Thus, if the Circuit Division is forced to pay the regular $7.80 price for the B2B fitting, it will neither get the contract nor will it suffer a substantial loss at a time when it is already operating at only 50% of capacity. The manager of the Circuit Division argues that the price concession is imperative to the well-being of both his division and the company as a whole. Spectrum Limited uses return on investment (ROI) to measure divisional performance. Required: Question 1.1 What is the lowest acceptable transfer price for Electrical Division and the highest transfer price for the Circuit Division? Show your workings. (6 marks) Your Answer: The lowest acceptable transfer price for Electrical Division The highest transfer price for the Circuit Division Show your workings here (expand the space as required)