Question 2 Transfer Pricing Vans produces a range of lifestyle footwear styles. The following question presents hypothetical data concerning the transfer of rubber from Vans' Rubber Department to the firm's Assembly Department. Beyond supplying other internal departments, the Rubber Department can also sell rubber to external customers for $2.00/kg. Relevant cost data for each department is supplied below.

	Rubber Department (price per kg of Rubber)	Assembly Department (price per unit)
Market price	$2.00	$130.00
Direct Materials	$1.00	$35.00*
Direct Labour	$0.20	$20.00
Variable Overhead	$0.10	$5.00
Fixed Overhead	$0.10	$4.00

*Does not include the cost of rubber. Required 1. Illustrate how the price for internally transferred rubber could be set using negotiation between the Rubber and Assembly Department managers. Identify and discuss the likely transfer price range and how this would impact the contribution margins of the respective departments. 2. Provide and discuss three examples which illustrate how the use of transfer prices based on cost-plus pricing could be used for rubber transfers. Ensure that these examples effectively illustrate how cost-plus pricing is influenced by the cost base and the markup. 3. Assume that the transfer price for rubber was set using the market price. If the Assembly Department was approached by an external supplier offering to supply rubber for $1.20/kg, what would be in the best financial interests of the Rubber Department? From a financial standpoint, would using the external supplier be in the best interests of the firm as a whole? What other factors should be considered by the firm in evaluating this proposal? 4. Provide and discuss examples which illustrate how the general transfer price rule could be used for rubber transfers. Which of the options provided would be preferred by each department? 5. Identify and discuss the most appropriate method of setting a transfer price for rubber in this situation.