4. A company operates two divisions, Able and Baker. Able manufactures two products, X and Y. Product X is sold to external customers for $42 per unit. The only outlet for product Y is Baker. Baker supplies an external market and can obtain its semi-finished supplies (product Y) from either Able or an external source. Baker currently has the opportunity to purchase product Y from an external supplier for $38 per unit. The capacity of division Able is measured in units of output, irrespective of whether product X, Y or a combination of both are being manufactured. The associated product costs are as follows.

X Y

Variable costs per unit 32 35

Fixed overheads per unit 5 5

Total unit costs 37 40

Required: Using the above information, provide advice on the determination of an appropriate transfer price for the sale of product Y from division Able to division Baker under the following conditions.

(a) When division Able has spare capacity and limited external demand for product X

(b) When division Able is operating at full capacity with unsatisfied external demand for product X