Reference no: EM132932920

Question - Grow Accounting and Business ServicesComputer ServicesManagement Advisory Services has two divisions, and .

Both divisions work for external customers and, in addition, work for each other, as illustrated above.

Fees earned by Computer Services from external customers were $520 000 in 2020.

Fees earned by Management Advisory Services from external customers were $680 000 in 2020.

Computer Services worked 2 800 hours for Management Advisory Services last year, and Management Advisory Services worked 1600 hours for Computer Services.

The total costs of external services performed by Computer Services were $220 000, and for Management Advisory Services costs were $480 000.

Required -

A. Determine the operating income for each division and for the company as a whole if the transfer price from Computer Services to Management Advisory Services is $45 per hour and the transfer price from Management Advisory Services to Computer Services is $60 per hour.

B. The manager of Computer Services has found another company willing to provide the same services as Management Advisory Services at $50 per hour. All of the employees in both units are guaranteed 40-hour work weeks. Currently, Management Advisory Services has idle capacity because of an economic downturn. Calculate the change in operating income for the entity as a whole if Computer Services uses outsourced services instead of using Management Advisory Services.

C. Recommend a transfer price policy that would provide incentives to use the internal services. Explain your recommendation.