What is role of transfer pricing in a decentralized firm

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Bernie Manufacturing Company has two divisions, X and Y. Division X prepares the steel for processing. Division Y processes the steel into the final product. No inventories exist in either division at the beginning or end of the year. During the year, Division X prepared 80 000 kgs. of steel at a cost of £800 000. All the steel was transferred to Division Y where additional operating costs of £5 per kg. were incurred. The final product was sold for £3 000 000.

Required:

Question (a) Determine the gross profit for each division and for the company as a whole if the transfer price is £8 per kg.

Question (b) Determine the gross profit for each division and for the company as a whole if the transfer price is £12 per kg.

Question (c) What is the role of transfer pricing in a decentralized firm? Explain.

Reference no: EM132570893

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