QUESTION ONE MB Group is a large electronics company making mobile phones, TVs and other electrical gadgets. Due to the varied nature of its businesses, it operates a divisional structure. One of its divisions is Alpha Ltd which manufactures mobile phones, with its most popular model called the 'Sigma'. Recent market research has produced the following data regarding the demand for 'Sigma'. 22 24 26 28 30 32 Selling Price () Demand (units) 20,000 18,000 16,000 13,000 9,000 7,000 The cost card for the 'Sigma' is: Direct Labour 0.5 hours at 12 per hour Direct Materials: 1 computer chip costing 10 1 mini circuit board costing 2 Other components costing 3 Overhead: 0.5 labour hours at 6 per labour hour Overheads are 80% fixed and 20% variable - this applies to all divisions within the Group. The computer chips are supplied by Beta Ltd and the mini circuit boards by Gamma Ltd that both are the divisions of MB Group. The other components are sourced extemally. Current data for the two components sourced internally are: Beta Ltd. Gamma Ltd. 1 Unit costs: Direct labour () Direct materials () Overhead () 4 2 0.25 0.5 1 Internal transfer price External market price 10 15 2 3 Beta Ltd is operating at full capacity with many orders to fulfil, whilst Gamma Ltd is short of orders and is currently considering staff redundancies. Required: (a) Using the recent market research data, which price-volume combination will maximise the total contribution made by Sigma' for Alpha Ltd? (14 Marks) (b) Calculate the ideal transfer prices which will maximise profits for the MB Group (12 Marks) (c) Using the ideal transfer prices calculated in part (b), re-calculate the price-volume combination to maximise the total contribution for Alpha Ltd. (12 Marks) (d) Identify the four alterative approaches to setting transfer prices and discuss how each of these is determined, clearly identifying how different approaches may result in conflict between managers of different divisions. (12 Marks)