2 1 j74 6 10 4 240 P.21.11 The AB Lid has two divisions, X and Y. One of the parts produced by division X is used in the manufacture of a product that is assembled at division Y. The part is not unique and there is a readily defined market such that X can sell outside the firm and Y can buy from outside. The following information is descriptive of the normal expectations of division X: Capacity to produce the part (units) 1,25,000 External sales at 100 per unit (units) 1,00,000 Transfer to division Y (units) 25,000 Costs: Variable manufacturing cost per unit 284 Variable selling costs (on external sales only but not incurred on internal transfers) Fixed manufacturing cost (based on 1,25,000 units) Fixed selling cost (based on 1,00,000 units) The division Y presents the following data on the assumption of a volume of 25,000 units (one part is needed for each unit of its own production): Variable manufacturing cost per unit (exclusive of transfer price or outside purchase price) *100 Variable selling expenses per unit Fixed manufacturing cost Fixed selling expenses Selling price of finished product REQUIRED: (1) If division X could sell 1.25.000 units at 100 each in the outside market, what transfer price would the company management prefer in order to provide proper motivation to division Y? (ii) As management accountant, would you advise division Y to buy at the transfer price determined in part 2 (ii) Assume the situation and the transfer price determined in part (1). If the selling price dropped to 3200, should Y buy at that price? Would this be desirable from the point of the firm? Why? (iv) Assume that division X's product did not have an outside demand in excess of 1,00,000 units and its total fixed manufacturing cost could be reduced by 10 per cent, if the volume of production were reduced by 10 per cent, if the volume of production were reduced to 1,00,000 units, what is the appropriate transfer price? (V) Suppose that X division's maximum outside demand is 1,10,000 units at $100, and there is no other usage for the capacity. What transfer price(s) should the company management prefer? (vi) Suppose the unit selling price of Y's product is 180; one of its customers is also a customer of division X: division Y refuses to buy the part from the outside market at 100 since the selling price of t180 would not be high enough to even cover the variable costs. If division X does not lower the transfer price, division Y will not sell to this customer who, in turn, will probably cancel the usual order of 50,000 units to division X: there is no other demand for the product and no other usage of X's capacity; fixed costs would not change at either division. What is the lowest transfer price that the division X would be well advised to accept? Support your recommendation with computations