The Fruity Bakers specialize in making delicious cakes. Their trademark fruit cake is made in Division A (the supplying division) and sold to external customers for them to decorate, or it can be enjoyed plain. It is also transferred to Division B (the receiving division) where it is iced and decorated to be sold as a luxury wedding cake. Fruity Bakers are currently trying to decide what the optimum price to sell the cakes from Division A to B should be in order to motivate the managers of both divisions. The following data shows the costs incurred by Division A to make a fruit cake and by Division B to ice and decorate the wedding cake:

$/unit

Division A Variable costs 20 Fixed overhead 8 =28

Division B Variable costs 40 Fixed overhead 5 = 45

Plain fruit cakes can be sold and purchased externally for $30. Wedding cakes can be sold for $100.

Required:

Should the company make the fruit cakes internally or buy them in?

What non-financial factors should also be taken into consideration?

What would be the implication of using the following transfer pricing policies?

a) Full cost plus 10%

b) Variable cost plus 55%

c) Variable cost only

d) The external market price