QUESTION ONEKanorer Enterprises Ltd has two divisions Mugaa and Gwashati. Mugaa division manufacture

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QUESTION ONEKanorer Enterprises Ltd has two divisions Mugaa and Gwashati. Mugaa division manufacturesan intermediate product for which there is no external market. Gwashati division incorporatesthe intermediate product into a final product, which it sells. One unit of the intermediateproduct is used in the production of the final product. The expected units of the final productwhich Gwashati division estimates it can sell at various selling prices are as follows:Net selling PriceSh.1009080706050Quantity soldUnits100020003000400050006000The variable and fixed costs of each division are as follows:MugaaGwashatiSh.Sh.Variable cost pr unit117Fixed cost per annum60,00090,000The transfer price is Sh.35 for the intermediate product, and is determined on a full cost-plusbasis.Required:Which selling prices maximize the profits of Gwashati division and the companyas a whole? Comment on why the selling price (which is selected by thecompany)isnotselectedbyGwashatidivision.(3 marks)It has been argued that full cost is an inappropriate basis for selling transferprices.Outline the objections which can be raised against this basis.(5 marks)

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