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QUESTION 3: TRANSFER PRICING. Total marks for this question: 15 marks [Suggested fime: 27 minutes] The Components Division produces a part that is used by the Goods Division. The cost of manufacturing the part follows: Other costs incurred by the Components Division are as follows: The part usually sells for between $28 and $30 in the external market. Currently, the Components Division is selling it to external customers for $29. The Component division has the capacity to produce 200,000 units of the part per year; however, because of a weak economy, only 150,000 parts are expected to be sold during the coming year. The variable selling expenses are avoidable if the part is sold internally. The Goods Division has been buying the same part from an external supplier for $28. It expects to use 50,000 units of the part during the coming year. The manager of the Goods Division has offered to buy 50.000 units from the Components Division for $18 per unit. 1. Using the general formula, calculate the minimum fransfer price that the Components Division would accept. ( 3 marks) 2. Determine the maximum transfer price that the manager of the Goods Division would pay. (1 mark) 3. (i)Should an internal transfer take place? Why or why not? (2 marks) (ii) If you were the manager of the Components Division, explain whether you would sell the 50,000 components for $18 each. (3 marks) 4. Assume 150,000 units are sold to the external customers and 50,000 is fransferred to the Goods Division for $21. Compute Component Division's net profit. (6 marks)

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