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Question 3 The Purple Rain Group consists of two divisions, X and Y. Division X manufactures aeroplanes for the private jet market. Division Y manufactures

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Question 3 The Purple Rain Group consists of two divisions, X and Y. Division X manufactures aeroplanes for the private jet market. Division Y manufactures aircraft engines used in private jets. Division Y sells its aircraft engines globally and also supplies Division X. The financial results for the two divisions for 2017 are as follows: * This figure includes the cost of aircraft engines that are transferred from Division Y. Division Y is currently working to full capacity. It is the policy of the group that divisions must always sell internally first before making sales outside of the group. Similarly, purchases have to be made from within the group wherever it is possible. However, Divisions X and Y are allowed to agree on their own transfer prices without head office interference. In the past, Division Y has charged the same price to Division X as it does to its external customers. However, after being offered a 15% lower price for similar aircraft engines from an external supplier, the manager of Division X feels strongly that the transfer price is too high and should be reduced. Division Y currently satisfies 80% of the external demand for its aircraft engines. Division Y 's variable costs represent 30% of the total revenue for the internal sales of the components. Requirement a) Calculate and explain the total transfer price (or prices) at which the aircraft engines should be supplied from Division Y to Division X. 13 Marks b) Transfer pricing in the international context has been criticised in the literature. Summarise the discussion about the role transfer pricing plays "in tax avoidance and wealth retentiveness" (Sikka and Willmott, 2010, p. 342). Also, outline international approaches that have been taken by governments to regulate transfer pricing behaviour of international intra-firm transactions. Total 207 Marks

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