The Question on Transfer Pricing.

Question 1 Jupiter Pte Ltd (\"JPL\") has two divisions I and Y; which are supported by an Administrative {\"Admin'] division. The Admin division provides printing, ling and stationery servioes. Estimated information for the year ending Elli? is as follows. {1] Division Division X Y Admin Division $m $m $m Capital Employed so so as Prot [before Admin division costs) El} 16 Total Costs: 14 {2] A target of 15% Return On Investment {R01} has been set for each division. {3] An ActivityBased Costing [ABC] analysis has revealed the following for the Admin Division: Serviceprovided . Division Division AdminDivision ___ We} N\" \"fwd\" n II' mm mm -_ nun\" employees {)4 The cost of capital is 14%. Required: {a} Compute the ROI for Division 3:, Division Y and the Admin Division if IPL's transfer pricing policy is: (i) To allocate total Admin cost on a SWSI'J basis; (ii) Total Admin cost to be distributed equally plus a prot markup of 313%; and (iii) Total Admin east to he charged on an activitybased costing approach. (15 marks] {h} Discuss the implications of each transfer pricing policy-r in part (a) for the three divisions. How would you advise J'PL with respect to performance management? (15 marks] J'PL has decided that transfer price from Admin Division to divisions X and Y should be set at activity-based costs. An external company has approached Division X to offer their administrative services (exactly the same services as those currently provided by Admin Division] at a fee. (i) Compute the maximum price that Division X will be willing to pay this external company. (i) che external company.r is willing to meet Division X's price demand {as computed in part {c](i)}, should IPL allow Division X to outsource their administrative requirements? Explain and state any necessary assumptions. (:5 marks]