QUESTION 2 CHiCHu Diamond Ltd is based in Melbourne has two divisions as follows: Kimberley Mining Division, which mines raw coloured diamond in Kimberley Hong Kong Processing Division, which polishes and cut raw diamonds into commercial grad diamonds. The Processing Division's yield is 2.75%, that is it takes 100 kilograms of raw diamonds to produc 2.75 kilogram of polished grade diamonds. Although all of the Mining Division's output of 5,000 raw diamonds is sent for processing in Hong Kong there is also an active market for raw coloure diamonds from Kimberley. The foreign exchange rate is Hong Kong Dollar (HKD) 7 = AUD1. TH following information is known about the two divisions: Kimberley Mining Division Variable cost per kilogram of raw coloured diamonds 840 AUD Fixed cost per kilogram of raw coloured diamonds 2,310 AUD Market price per kilogram of raw coloured diamonds 4,275 AUD Tax rate 30% Hong Kong Processing Division Variable cost per kilogram of polished diamonds 133,000 HKD Fixed cost per kilogram of polished diamonds 497,000 HKD Market price per kilogram of polished diamond 2,310,000 HKD Tax rate 16.5% Required: (a) Calculate the annual pre-tax operating profit, in Australia dollars(AUD) of each division under the following transfer-pricing methods: (i) Full cost + 200% (ii) Market price 19 mark (b) Calculate the after-tax operating profit, in AUD for each division under the transfer-pricing methods as stated in part (@) above. (Note: Income taxes are not included in the calculation of cost-based transfer price and CHICHu Diamonds Lid does not pay Australia Income Tax on income already taxed in Hong Kong) (2 Mark ) If the two division managers are compensated based on after-tax division operating profit, whic transfer-pricing method will each prefer? Which transfer-pricing method will CHiCHu Ltd ado if the Board of Directors' objective is to maximize the company's total after-tax operating profit (2 mark Total: 13 mark