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

Tock a satis poian vi dies The sin disine, hich deBatey dialison, whin

manufactures batteries for the motor vehicle industry.

Comp omarestor is Bater maratris got the componens globally and also supplies Fork The financial resuls for the two companies farte year ended Scrember 30, 2023, a clows:

Fork Co

Design division Battery division

s000

S000

S000

External sales

Sales to Battery division

14,300

25,535

8,010

7,550

(4,900)

(3,400)

15,560

Cost of sales

Administrative costs

Distribution costs

Net Operating Income

Average Operating Assets

* Includes the cost of components purchased from Comp Co

6,000

23,540

(16,200)

(4,200)

(1,260)

3,875

32,320

* (5,280) (2,600) (670) 7,010 82,975

ge want it in te gos lite posite Have in out is and companies are

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

Required:

a. Discuss the performance of Comp Co and each division of Fork Co, calculating and using the following performance measures: Return on Investment (ROl) Note: There are 4.5 marks available for calculations and 5.5 marks available for discussion. (10 marks)

1. Compute the maximum transfer price that Battery Division would be willing to pay and briefly state the rationale behind this price. (2 marks)
2. 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)
3. 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.