The Black Water Group comprises two companies, Fork Co$,$ and Comp Co$.$

Fork Co is a trading company with two divisions: The Design division, which designs specialized forklift

trucks to customer specifications and supplies the designs to customers and the Battery division, which

manufactures batteries for the motor vehicle industry.

Comp Co manufactures components for batteries. It sells the components globally and also supplies Fork

Co with components for its Battery manufacturing division.

The financial results for the two companies for the year ended September $30,2023,$ are as follows:

Fork Co Comp Co

Design division Battery division

$$000$ $$000$ $$000$

External sales $14,30025,5358,010$

Sales to Battery division $7,550$

$15,560$

Cost of sales $(4,900)(16,200)*(5,280)$

Administrative costs $(3,400)(4,200)(2,600)$

Distribution costs $(1,260)(670)$

Net Operating Income $6,0003,8757,010$

Average Operating Assets $23,54032,32082,975$

$*$ Includes the cost of components purchased from Comp Co

Comp Co is currently working to full capacity. The Black Water group$$s policy is that group companies

and divisions must always make internal sales first before selling outside the group. Similarly, purchases

must be made from within the group wherever possible. However, the group divisions and companies are

allowed to negotiate their own transfer prices without interference from the Head Office.

Comp Co has always charged the same price to the Battery division as it does to its external customers.

However, after being offered a $5\%$ lower price for similar components from an external supplier, the

manager of the Battery division feels strongly that the transfer price is too high and should be reduced.

Comp Co currently satisfies $60\%$ of the external demand for its components. Its variable costs represent

$40\%$ of revenue.

Required:

a$.$ Discuss the performance of Comp Co and each division of Fork Co$,$ calculating and using the

following performance measures:

i$.$ Return on Investment $($ROI$)$

ii$.$ Asset turnover

iii. Net Operating Income Margin

Note: There are $4\mathrm{.}5$ marks available for calculations and $5\mathrm{.}5$ marks available for discussion. $(10$

marks$)$

$7$

b$.$ Compute the maximum transfer price that Battery Division would be willing to pay and briefly

state the rationale behind this price. $(2$ marks$)$

c$.$ Compute the minimum transfer price that Comp Co would be willing to agree on$.$ Discuss the

rationale behind this price.

Note: $3$ marks are available for calculation and $2$ marks are available for discussion. $(5$ marks$)$

d$.$ Assuming Comp Co has constant output which cannot be adjusted, provide an overall conclusion

on whether the manager of Comp Co should consider negotiating a lower transfer price with the

Battery division manager.