Question Two Sithland Ltd manufactures action hero figurines. Recently, the company introduced the Srider, a half-man, half-spider hero riding on a unicorn. Among other components, each unit of Srider requires a pair of \"Beastly Blue\" nonreflective glass eyes, which can be purchased from the Glass Eyes department, or from external suppliers. Contrary to popular belief, the market for glass eyes is actually highly competitive and is a growth industry. It is, however, the "unwritten law\" in Sithland Ltd that glass eyes of all action hero figurines are purchased from the Glass Eyes department if excess capacity exists. Both the Glass Eyes and Assembly departments are decentralised profit centres, and all managers receive bonuses based on the performance of their divisions. The following exchange was overheard by you in Sithland's latest transfer pricing meeting, between Maria, manager of the Glass Eyes department, and John, the manager of the Assembly department. John: Come on, Maria, I know you're running below capacity in your division. I want to purchase 20,000 units of Beastly Blue at $4 a pair. That will enable you to keep your production lines busy. Maria: No way! I know it would cost you a lot more if you buy the Beastly Blues from outside suppliers I think the market price is $7.50 a pair. I am not going to accept any offer less than that, which gives us the usual mark-up over all our costs. John: But, but, but I know for a fact that your unit variable cost is only $3. All other costs are committed. Even $4 a pair will give you a decent profit. It's not like you have other customers queuing outside your door offering $7.50 a pair anyway! Maria: Not decent enough I'm afraid! Rumour has it that Comic-Hero-Wannabes may be developing a new \"Sergeant Tasmania\" toy, and they're going to need glass eyes. I stand by $7.50, take it or leave it! As a result ofthis exchange, John eventually purchased the required glass eyes from outside suppliers at $7.50 a pair; while Maria's department continued to operate below capacity. Required: (a) Based on the "general rule\" for transfer pricing, what should the transfer price be for one pair of Beastly Blue glass eyes? (b) State TWO|2| likely reasons why Maria refused to sell the Beastly Blue glass eyes to John at the price he is asking. (c) To prevent situations like this occurring again in the furture, Sithland Ltd is considering changing the company's compensation scheme to reward managers based on the overall performance of Sithland Ltd rather than divisional performance. Do you agree with this approach? Explain your answer in light of Agency Theory Expectancy Theory