3. Archer group has two divisions, Division X and Division Y. Division X manufactures a component X8 which is transferred to Division Y. Division Y uses component X8 to make a finished product Y14, which it sells for $20. There is no external market for component X8.

Costs are as follows:

Division X Division Y

Component X8 Component Y14

Variable production cost per unit $5 $3*

Annual fixed costs $40,000 $80,000

*Excluding the cost of transferred units of X8.

The budgeted output and sales for Product Y14 is 20,000 units. One unit of component X8 goes into the manufacture of one unit of Y14.