Question Four (5 marks) Mobe Co manufactures electronic mobility scooters. The company is split into two divisions: the scooter division (Division S) and the motor division (Division M). Division M supplies electronic motors to both Division S and to external customers. The two divisions run as autonomously as possible, subject to the groups current policy that Division M must make internal sales first before selling outside the group; and that Division S must always buy its motors from Division M. However, this company policy, together with the transfer price which Division M charges Division S, is currently under review.

Details of the two divisions are given below.

Division S Division Ss budget for the coming year shows that 35,000 electronic motors will be needed. An external supplier could supply these to Division S for $800 each.

Division M Division M has the capacity to produce a total of 60,000 electronic motors per year. Details of Division Ms budget, which has just been prepared for the forthcoming year, are as follows:

Budgeted sales volume (units) 60,000

Selling price per unit for external sales of motors $850

Variable costs per unit for external sales of motors $770

The variable cost per unit for motors sold to Division S is $30 per unit lower due to cost savings on distribution and packaging.

Maximum external demand for the motors is 30,000 units per year.

Required: Assuming that the groups current policy could be changed, advise, using suitable calculations, the number of motors which Division M should supply to Division S in order to maximize group profits. Recommend the transfer price or prices at which these internal sales should take place.