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QUESTION TWO [25] Tap Co. is a company specializing in the manufacture and sale of Taps. Each Tap consists of a main unit plus a
QUESTION TWO [25] Tap Co. is a company specializing in the manufacture and sale of Taps. Each Tap consists of a main unit plus a set of Tap fittings. The company is split into two divisions, A and B. Division A manufactures the tap and Division B manufactures sets of tap fittings, Currently, all of Division A's sales are made externally. Division B, however, sells to Division A as well as to external customers. Both of the divisions are profit centres. The following data are available for both divisions: The transfer price charged by Division B to Division A was negotiated some years ago between the previous divisional managers, who have now both been replaced by new managers. Head office only allows Division A to purchase its fittings from Division B, although the new manager of Division A believes that he could obtain fittinas of the same quality and 2.2 Head office is considering changing the transfer pricing policy to ensure maximization of company profits without demotivating either of the divisional managers. Division A will be given autonomy to buy from external suppliers and Division B to supply external customers in priority to supplying to Division A. Calculate the maximum profit that could be earned by Tap Co. if transfer pricing is optimized. (11)
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