Enormous Engineering (EE) is a large, multidivisional engineering company with interests in a variety of product markets. The Industrial Products Division (IPD) sells components to consumer appliance manufacturers both inside and outside the company. One such part, a motor unit, is sold solely to external customers but buys the motor itself internally from the Electric Motor Division (EMD). EMD makes the motor to IPD's specifications and does not expect to sell it to any other customer.

IPD's sales and production data are shown below; EMD offers a transfer price of N16 to IPD. The variable and fixed costs per unit for EMD are N6 each, giving a total cost of N12 per unit. IPD will incur only a variable cost of N4 on the component (amounts in N'000).

Required:
a) Show the profit computations for both divisions and the company as a whole. [21 points]

b) What selling price and quantity would IPD select, and why? [4 points]

c) What selling price would be in the overall company interest, what would be the likely reactions of the managers of IPD and EMD, and what resolution would you propose? [15 marks]

The profit computation for IPD is the selling price (N16) minus variable cost (N4), which equals N12. The profit computation for EMD is transfer price (N16) minus total cost (N12), which equals N4.

The company's overall profit is sum of IPD's and EMD's profits, which is N16. IPD would select a selling price of N16, as this is the transfer price offered by EMD. The quantity would depend on the demand from external customers. The selling price in the overall company interest would be N16, as it maximizes the company's profit. The managers of IPD and EMD may have different reactions.

IPD's manager would prefer a higher selling price to increase IPD's profit, while EMD's manager may prefer a lower selling price to increase the internal sales volume. A resolution could involve negotiating a transfer price that benefits both divisions while maximizing the company's profit.

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