An organisation has two divisions; Division Y and Division Z. Division Y is currently working at full capacity and transfers 50,000 components to Division Z each year. Division Z uses the component in its product, the X.There is an external market for 20,000 units of the component with a market price of 50 per unit. The variable cost of the component is 20 per unit.Currently transfers are made under marginal cost pricing however the manager of Division Y is unhappy with this and has suggested either market price or dual pricing with a fixed fee of 50,000 per annum.

Required:

1. Identify the transfer price if marginal costing is used and the transfer price if dual pricing is used.
2. Given that there is an external market for the component, what price could Division Y argue should be used as the transfer price and why?

Explain the importance of divisional managers agreeing upon fair transfer prices