Sydney Suits is a manufacturer of designer suits. The firm has two departments. The Finishing Department receives fabric from the Fabric Department before producing and selling the finished suits for $2,500 per unit. Each suit requires 10 metres of fabric. Fabric can be purchased and sold on an outside market for $40 per metre. The Fabric Department currently has no spare capacity. Fabric Department (price per metre) Finishing Department (price per unit) Direct material cost $17.50 $350.00* Direct labour cost $5.00 $440.00 Variable overhead cost $2.50 $220.00 Fixed overhead cost $2.50 $110.00 Total manufacturing cost $27.50 $1,120.00 * Does not include the cost of fabric transferred from Fabric Department. Required: Suppose that Sydney Suits rewards each departmental manager with a bonus equal to 1.25% of their departments contribution margin (if positive) and the annual volume is 750 suits.

(1) What is the amount of bonus that will be paid to each departmental manager if the transfer price is set using cost plus pricing based on variable cost with a 40% mark-up? Is this transfer price likely to be acceptable to both managers?

(2) Suppose that Sydney Suits is evaluating the adoption of the general transfer price model to set transfer prices. Discuss how this would impact the departmental managers bonuses and why this use of the general transfer price rule might be beneficial to the firm.