Wash Co assembles and sells two types of washing machines – the Spin (S) and the Rinse (R). The company has two divisions: the assembly division, and the retail division. The company’s policy is to transfer the machines from the assembly division to the retail division at full cost plus 10%. This has resulted in internal transfer prices, when S and R are being transferred to the retail division, of $220·17 and $241·69 respectively. The retail division currently sells S to the general public for $320 per machine and R for $260 per machine. Assume it incurs no other costs except for the transfer price. The retail division’s manager is convinced that, if he could obtain R at a lower cost and therefore reduce the external selling price from $260 to $230 per unit, he could significantly increase sales of R, which would be beneficial to both divisions. He has questioned the fact that the overhead costs are allocated to the products on the basis of labour hours; he thinks it should be done using machine hours or even activity based costing. You have obtained the following information for the last month from the assembly division: Required: (a) Using traditional absorption costing, calculate new transfer prices for S and R if machine hours are used as a basis for absorption rather than labour hours. Note: round all workings to 2 decimal places. (3 marks) (b) Using activity based costing to allocate the overheads, recalculate the transfer prices for S and R. Note: round all workings to 2 decimal places. (8 marks) (c) (i) Calculate last month’s profit for each division, showing it both for each product and in total, if activity based costing is used. (3 marks) (ii) You have calculated the profits that both divisions made last month using traditional absorption costing and found them to be as follows: * Note: small differences arise in figures because of rounding. Required: Given these two sets of figures and your calculations in (c) (i), discuss whether activity based costing should be implemented. Consider the decision from the view of each of the divisional managers. (6 marks)