Why is transfer pricing such a significant issue both from a financial and managerial perspective?

Assignment OverviewCoffee Maker’s Incorporated (CMI)Three divisions of a CMI are involved in a dispute. Division A purchases Part 101 and Division B purchases Part 201 from a third division, C. Both divisions need the parts for products that they assemble. The intercompany transactions have remained constant for several years.Recently, outside suppliers have lowered their prices, but Division C refuses to do so. In addition, all division managers are feeling the pressure to increase profit. Managers of divisions A and B would like the flexibility to purchase the parts they need from external parties at a lower cost and increase profitability.The current pattern is thatDivision A purchases 2,700 units of product part 101 from Division C (the supplying division) and another 1,300 units from an external supplier.Division B purchases 1,100 units of Part 201 from Division C and another 700 units from an external supplier.Note that both divisions A and B purchase the needed supplies from both the internal source and an external source at the same time.The managers for divisions A and B are preparing a new proposal for consideration.Division C will continue to produce Parts 101 and 201. All of its production will be sold to Divisions A and B. No other customers are likely to be found for these products in the short term, given that supply is greater than demand in the market.Division A will buy 2,000 units of Part 101 from Division C at the existing transfer price; and2,000 units from an external supplier at the market price of $900 per unit.Division B will buy 900 units of Part 201 from Division C at the existing transfer price; and900 units from an external supplier at $1,800 per unit.Division C Data Based on the Current AgreementPart101201Annual volume (units)2,7001,100Transfer price/unit$1,000$2,000Variable expenses/unit$700$1,200The fixed overhead for Division C is $1,200,000.Case AssignmentRequired:Computations (use Excel)Set up a table similar the one below to compute the difference between the current situation and the proposal for Divisions A and B. Division ACurrent SituationProposalNo. of UnitsPurchase PriceTotal PurchasesNo. of UnitsPurchase PriceTotal PurchasesInternal purchases2,700$2,000$External purchases1,3002,000Total cost for Part 101$$Savings to Div. A$Compute the operating income for Division C under the current agreement and the proposed agreement.Is the revised agreement a good idea? Support your answer with computations.Memo (use Word)Write a 4- or 5-paragraph memo to the division manager explaining the analysis performed. Start with an introduction and end with a recommendation. Each of the four or five paragraphs should have a heading.Short Essay (use Word)Start with an introduction and end with a summary or conclusion. Use headings.Evaluate and discuss the implications of the following transfer pricing policies:Transfer price = cost plus a mark-up for the selling divisionTransfer price = fair market valueTransfer price = price negotiated by the managersWhy is transfer pricing such a significant issue both from a financial and managerial perspective?