There is a case study about transfer pricing provided below with answers.

I cannot understand where the figures have came from and how is it worked out. Please explain how to work through the answers step by step, to help me get my understanding to answer the question.

Case Study:

Explain how a rm should arrive at the theoreticahfy optimum transr price [for maximisation of group prots) a) General transfer pricing theory (e.g. Hirshliefer) states that the optimum transfer price is the opportunity cost of the selling division. For a division that has spare capacity at present the opportunity cost will be the marginal (variable) cost of units transferred. For a division that is operating at fhll capacity the opportunity cost of its output is the external market price (as inter-company transfers are assumed to be at the expense of external sales). ...appiy this theory to the situation described at WT to calculate revised transfer prices for chassis and bodies supplied to Assembly. Give fail reasons for your choice of transfer price. As Chassis presently has spare capacity its opportunity cost is its marginal (variable) cost of $580 per chassis. This should be its transfer price to Assembly. As Bodies is operating at l capacity it would have to turn away external orders to supply Assembly. Its opportunity cost is therefore marginal cost (of $250) phls lost contribution on external sales forgone (of $530-250 = $280). Hence transfer price should be $250 + 280 = $530, which is the market price for bodies. Therefore, the transfer price to assembly should be the market price of $530. BACKGROUND Wellington Trailers Led. (WT) manufactures and sells quality car trailers and is organised in a divisional structure with three divisions named "Chassis', "Bodies' and "Assembly'. Each division currently operates as a profit centre, with managers receiving a bonus relating to improvements in divisional profits. The managing director (MD), Geoff Lynne, has called you in as a consultant because he is concerned that the issue of transfer prices between divisions has not been adequately considered. One of WT's core products is the popular, 'Titan' trailer and Geoff has suggested that you concentrate on this product to investigate the transfer pricing issue. DETAIL All three divisions contribute to the Titan trailer and each have the practical capacity to produce 600 units. Chassis makes the chassis and delivers them directly to Assembly. Similarly Bodies makes the bodies and delivers them directly to Assembly. This leaves Assembly to bolt the body onto the chassis and attach all fittings (purchased from outside WT Lid) to produce a finished trailer ready for sale. The manager of the Assembly division, Roy Orbison, has commissioned a marketing consultant to establish the potential demand for the Titan trailer. Inevitably expected sales volumes will depend on the sales price chosen and are predicted as follows: Sales price $3.000 $3,500 $4,000 $4,500 $5.000 Page 1 of 4 Wellington Trailers Unit sales 550 420 325 250 190 Assembly absorbs fixed overheads on the basis of a practical capacity and the full cost per trailer is shown below: Assembly division costing: Direct labour (10 hours at $40) 400 Direct materials: Chassis 1,120 Body 490 Fittings 390 Variable overheads 200 Fixed overheads 200 Total cost 2,800 You establish that the two supplying divisions also absorb their fixed overheads on the basis of a practical capacity and transfers between divisions have always been at full cost plus a markup of 40%. Details for the Titan trailer, from the Chassis and Bodies Divisions, are as follows:Chassis Bodies S Direct labour 200 100 Direct materials 330 130 Variable overheads 50 20 Fixed overheads 220 100 Mark up 320 140 Transfer price 1,120 490 Roy wants to masimiss the profits of his Assembly division. Therefore, using a marginal costing approach, based on the marketing consultant's demand estimates and Assembly's costings based on the present transfer prices (above), Roy has calculated the price-volume combination that maximizes Assembly division profits: S $ S Price 3,000 3.500 4,000 4,500 5,000 Variable cost/unit 2,600 2.600 2,600 2,600 2.600 Page 2 of 4 Wellington Trailers L Contribution/unit 400 420 325 250 190 900 220,000 378,000 455,000 475,000 456,000 1,400 1,900 2.400 Unit sales 550 Total contribution You talk next to the manager of the Cassis division, Bob Dylan, and establish that Chassis would normally sell an equivalent chassis in the competitive external market at $1,000 but has recently made only a few external sales and thus has plenty of spare capacity at present. Tom Petty, manager of the Bodies division, tells you that Bodies could sell equivalent bodies for $530 in the external market and in fact has had to turn away external business in order to supply Assembly with the bodies they require.REQUIRED Prepare a consultant's report to the MD of 1Wellington Trailers Ltd, Jeff Lynne. Your report should cover the following: a} Explain how a rm should arrive at the theoretically optimum transfer price {for maximisation of group prots) and apply this theory to the situation described at WT to calculate revised transfer prises for chassis and bodies supplied to Assembly. Give full reasons for your choice of transfer price