The Hong Kong Home Products company has two divisions, Appliances and Kitchen Designs. The Appliance division supplies refrigerators to the Kitchen Designs division. The capacity of the appliance division is 2,000 refrigerators per year. The variable cost of production is $60 per refrigerator. The fixed cost per unit is $100 (based on a volume of 2000 units). The market price for this category of refrigerator is $225 per unit.

Required:

1. If the Appliance division is at capacity, what is the optimal transfer price?

2. If the Appliance division has excess capacity, what is the best decision for the company, as a whole, buy inside or outsource?

3. What transfer price with divisional decentralization will provide the optimal solution for the company in part 2?

4. What other factors would become important if the Kitchen Designs division is located in Manila, Philippines? Assume that the applicable tax rate in the Philippines is 30% and in Hong Kong is 15%