Question Transfer Pricing (12 marks) Fruities Ltd has two divisions. Durian Division and Juice Division. Durian Division has an annual capacity of 10,000 units of durian juice concentrate. Juice Division's annual requirement of durian juice concentrate is 8.000 units. Fruities Ltd requires that divisions should purchase inputs internally where available and uses a cost-plus transfer price policy, where transfer price is set at variable cost plus 25 per cent. Therefore, Durian Division always satisfies the demand of the Juice Division first, before selling the remaining durian concentrate to external suppliers at the market price of $10 per unit. The variable cost of one unit of durian juice concentrate at Durian Division is $6, but the division Incurs $1 additional shipping cost per unit when selling to external suppliers. The current external demand for Durian Division's durian juice concentrate is 5,000 units. Required: a) Assuming it has spare capacity, calculate the difference in Durian Division's profit under the cost-plus transfer price policy and a market price transfer price policy (i.e. using market price as the transfer price). (4 marks) b) Calculate the impact on the annual profits of each of the two divisions and the company as a whole, under the cost-plus transfer price policy and a market price transfer price policy (.e. using market price as the transfer price). c) Assuming it has no spare capacity, use the general transfer pricing rule to determine how much should Durian Division charge the Juice Division? (2 marks) d) Now assume there is no external market for durian juice concentrate; however, the Durian Division can use its facilities to manufacturer prune paste, which is a very popular product with unlimited extemal demand, at $13 per unit. The variable production cost of one unit of durian juice concentrate at Durian Division is $6, and the variable production cost of one unit of prune paste is $8. Durian division also incurs $1 additional shipping cost per unit when selling prune paste to external suppliers. Using the general transfer pricing rule, what is the per unit opportunity cost of selling one unit of durian juice concentrate to Juice Division? (2 marks) e) Provide two examples where the use of ROI can lead to decisions that may harm the future competitiveness of a company. (4 marks)