SW is a manufacturing company. its main product that it sells is an OTR tyre. the company sources tree gum in the area which it uses to produce rubber. most of the rubber is then sold to its tyre manufacturing division and the rest is sold in the market mainly to show manufacturers. thus the company has two divisions, the rubber producing (RP) and Tyre producing (TP) divisions. Refer to the picture below and answer the follwing questions:

1. Calculate the profit for each division and SW as a whole in table format using rhe current trnasfer pricing policy. Your answer should clearly show the revenue and costs figures for internal and external sales where relevant.

2. Based on the new policy, and assuming it is best for RP, calculate the number of kilograms that RP should sell externally and the number of kilograms that RP should sell internally. Provide detailed justification of how you arrived at the transfer price.

3. Using the old transfer pricing policy, what minimum price should the RP charge for the extra units required bt the TP division if the TP division wants to meet their maximum demand for the OTR tyre. provide detailed justification of how you arrived at the transfer price

NS 22 000 The following information relates to the TP division TP division Selling price for TP tyre Costs per TP tyre: Rubber from RP division (80kg per tyre) Other ingredients externally sourced Direct labour cost Fixed overheads per year Units of TP produced and sold locally and internationally per year Maximum demand in units for TP per year 8 000 4 500 3 500 34 600 000 15 000 18 000 The information relating to the RP division is also presented as follows: RP division Selling price per kilogram of rubber mulch sold internally NS 100 Selling price per kilogram to external customers (per kg) Tree gum extraction costs + cost of materials (per kg) Labour costs (per kg) Fixed overheads per year 150 65 20 20 000 000 Annual capacity (kilograms) Internal sales (kilograms) External demand in kilograms 1 800 000 1 200 000 600 000 The RP division incurs a variable distribution cost of N$5 for each kilogram of rubber that it sells outside. The Head Office currently enforces that the TP division buys its tyres from the RP division. However, at the present moment, the RP division cannot increase their supply of rubber to the TP division due to the limited supply of tree gum to produce rubber The trees from which the gum is extracted are in short supply and the company has a fixed quota of gum that it can extract over the next five years as imposed by the Ministry of Forestry The divisional head of the TP division presented her argument that if the Head Office could allow her to source rubber extemally, she is able to get it at exactly the price that the RP division is selling to them with an additional N$5 per kilo for transportation cost. Given these squabbles, the Head Office of SW held a meeting with both divisional heads and allowed the TP division to purchase rubber from outside as long as the SW profit will be maximised. For simplicity. you may assume that the TP division buys rubber from the RP division in the same package designed for external sales. NS 22 000 The following information relates to the TP division TP division Selling price for TP tyre Costs per TP tyre: Rubber from RP division (80kg per tyre) Other ingredients externally sourced Direct labour cost Fixed overheads per year Units of TP produced and sold locally and internationally per year Maximum demand in units for TP per year 8 000 4 500 3 500 34 600 000 15 000 18 000 The information relating to the RP division is also presented as follows: RP division Selling price per kilogram of rubber mulch sold internally NS 100 Selling price per kilogram to external customers (per kg) Tree gum extraction costs + cost of materials (per kg) Labour costs (per kg) Fixed overheads per year 150 65 20 20 000 000 Annual capacity (kilograms) Internal sales (kilograms) External demand in kilograms 1 800 000 1 200 000 600 000 The RP division incurs a variable distribution cost of N$5 for each kilogram of rubber that it sells outside. The Head Office currently enforces that the TP division buys its tyres from the RP division. However, at the present moment, the RP division cannot increase their supply of rubber to the TP division due to the limited supply of tree gum to produce rubber The trees from which the gum is extracted are in short supply and the company has a fixed quota of gum that it can extract over the next five years as imposed by the Ministry of Forestry The divisional head of the TP division presented her argument that if the Head Office could allow her to source rubber extemally, she is able to get it at exactly the price that the RP division is selling to them with an additional N$5 per kilo for transportation cost. Given these squabbles, the Head Office of SW held a meeting with both divisional heads and allowed the TP division to purchase rubber from outside as long as the SW profit will be maximised. For simplicity. you may assume that the TP division buys rubber from the RP division in the same package designed for external sales