Question 1 Sumsong is a company specializing in the manufacture and sale of laptop batteries and laptop computers over the past 15 years. It has two divisions: the battery division (Division B) and the laptop division (Division L). Division L manufactures and sells laptop computers to local distributors. Division L purchases most of its materials and components from an external supplier, X Company, except laptop batteries. Division L uses laptop batteries internally supplied by Division B. Each laptop computer manufactured by Division L requires one laptop battery. Division B is given free autonomy to set the transfer price, but is required to meet Division L's demand for batteries before selling externally. The following data is available for both divisions: Division L Selling price for each laptop $900 Variable cost per laptop: Laptop battery from Division B 100 Other materials and components from external suppliers 400 Direct labour 250 Annual fixed overheads 5,500,000 Annual production and sales units 70,000 Maximum annual market demand (units) 100,000 Division B Selling price per battery to external customers $80 Variable cost per battery: Direct materials 20 Direct labour 10 Annual fixed overheads 3,000,000 Annual production and sales units 100,000 Maximum annual external demand (units) 80,000 In addition to the materials and labour costs above, Division B incurs a variable cost of $5 for packaging each battery for all external sales. Currently, the Head Office's purchasing policy allows Division L to purchase the batteries only from Division B. The manager of Division L is unhappy as X Company, a long-time supplier, has offered to supply laptop batteries at a special rate of $40 per battery to Division L. The cost of placing an order for batteries from Company X is estimated to be $50, and the annual holding cost of a battery is estimated to be 1% of the purchase price.After numerous discussions with both divisional managers, to ensure that the divisional managers stay motivated, Head Office has agreed to changes in corporate policies. Specifically, Head Office has agreed to allow (i) Division L to buy externally; and (ii) Division B to sell externally at any quantity; provided that the divisions work together to optimize the profits of Sumsong as a whole. (b) Recommend an arrangement that would optimise Sumsong's profits. Include in your proposal an appropriate transfer pricing arrangement that could be acceptable to both divisions. Support your proposal with computations. (8 marks)