The Soft Company produces and sells soft squishy animals and has two divisions Forming and Assembly. Currently the Forming division buys a part from Assembly for $675. The Assembly division wants to increase the price of the part it sells to Forming to $765, which is the price it charges customers outside the group. The cost data for the Assembly division is as follows:

Direct materials $75.00

Direct labour $67.50

Variable overhead $37.50

Fixed overhead $21.00

Required:

Explain and calculate the transfer prices at which Assembly should offer to transfer the part to the Forming division in order that the group profit maximizing decisions may be taken on financial grounds in each of the following independent situations:

(a) Assembly division has an external market for its entire product. (3 marks)

(b) Assembly division has excess capacity to supply all parts needed by the Forming division.

(2 marks)

(c) Assembly division has excess capacity for only 4,000 of the total 10,000 parts needed by the Forming division. However, the Assembly division has an alternative use of this excess capacity which equates to a contribution of $12 for each part. (5 marks)

(d) Explain two objectives of transfer pricing systems. (4 marks)

(e) Discuss briefly three (3) benefits to management of establishing responsibility centres.

(6 marks)