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Question 2.
Ignoring your answer to question 1, if the plant were not built and AR-42 was shipped from Netherlands to the UK, what transfer price would be appropriate?
Firstly, we need to analyze the decision by identifying the advantage and disadvantage of manufacturing more product in Netherlands. The advantage is Hollandsworth would not take any financial risk, no borrowing would be necessary. Also, Axeon Dutch operations would see benefits from a lower variable cost for the entire product produced realizing financial rewards for them as well. When the production is increased in Netherlands, it will result in decreasing of fixed cost (mentioned in text by 240 per tons). Besides, Hollandsworth would mitigate its risk of having excess of raw material or finish goods as they would only source from Axeon as needed. Axeon can also prolong the production when more product produced. This will lower the set-up cost and the mass purchasing will give more cheaply of raw material price.
The disadvantage is there may be a risk of Hollandsworth will depend entirely on its product sourcing from another subsidiary, if for any reason there are manufacturing issues at Axeon there would be a conflict of interest on who to supply first. Besides, Ian Wallingford might lose motivation after spending many months and resources in a proposal that from the beginning had a good acceptance by both boards. Also, Dutch operations would see their product being sold at cost price, which could alienate some people in the event of problems with the customer (Hollandsworth). This will occur when the chemical is produced in Hollandsworth and in same time by Dutch operations.
The AR-42 is a very small project in terms of sales increase for Hollandsworth therefore we think that Hollandsworth and Axeon should not spend all the time and resources on it since it is proven that the Dutch operations have excess of capacity that can be used to produce the product required for the U.K. market. Since the

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