A company has two division, A and B. Division A manufactures a component which is used by Division B to produce a finished product. For the next period, output and costs have been budgeted as follows.

Particulars: Division A Division B

Component units 50,000 ----------

Finished units ---------- 50,000

Total variable costs - Rupees 250,000 600,000

Fixed Costs Rupees 150,000 200,000

The fixed costs are separable for each division. You are required to advise on the transfer price to be fixed for Division A's component under the following circumstances.

A. Division A can sell the component in a competitive market for Rs.10 per unit. Division B can also purchase the component from the open market at that price.

B. As per the situation mentioned in (A) above, and further assume that Division B currently buys the component from an external supplier at the market price of Rs.10 and there is reciprocal agreement between the external supplier and another Division C, within the same group. Under this agreement, the external supplier agrees to buy one product unit from Division C at a profit of Rs. 4 per unit to that division, for every component which Division B buys from the supplier.