Affan Manufacturing Inc. (AMI) produces electronic components and has three divisions: commercial, industrial and consumer products division. The commercial products division purchases 10,000 units of part AYK annually, which is used in production of the industrial division's products. The commercial division is rapidly growing. Because of growth in its production, commercial division now wants to increase its purchases of part AYK to 15,000 units annually. Ahmed Qazi, GM of industrial division claims that his division is running at full capacity. AMI has made no new investment in the industrial division for some years because top management sees bleak future for Ahmed Qazi and his division, so its capacity is unlikely to expand soon. The commercial division can buy part AYK from Anna Inc. or from Bilal Electric. Bilal Electric is a customer of the industrial division, purchasing 650 units of part BBM. The industrial division's revenue from Bilal would not be affected by wherever commercial division buys part AYK from.

Industrial division

Data on part AYK:

Price quoted to commercial division

Rs.185

Variable manufacturing costs

155

Price charged to outside buyers

175

Data on part BBM:

Variable manufacturing costsRs.65

Selling price95

Other suppliers for part AYK:

Anna Inc., priceRs.200

Bilal Electric, price210

Required

1. Where the commercial division should buy the additional 5,000 parts and if buy internally, what should be the recommended transfer price?

2. Given your answer to Requirement 1 above, are there any long-term strategic implications of such decision?

3. Transfer Prices sometimes convert fixed costs into variable costs of an organization, making it uncompetitive. Do you agree? Why? Why not?