Buzzcock plc operates as a group of integrated business divisions. East Division manufactures a component which it sells to West Division (there is no external market for this product). West Division incorporates one component into each unit of a final product which is sold to external customers. The West Division has prepared sales budgets for the next accounting period as follows:

Selling price		Sales volume
		(units)
1,040		22,000
1,025		26,000
1,000		30,000
950		34,000
890		38,000

The divisions have the following budgeted costs:

East Division West Division

Variable cost per unit 20 480

Total fixed costs 1m. 2.8m.

The planned transfer price of the component, calculated on a standard total cost plus basis, is 180 per unit. The divisions can only produce in batches of 4,000 units.

Required:

a) Prepare budgeted profit statements for each division and for the company as a whole at each of the production/sales volumes given above.

b) Comment on your figures in a) in the context of the transfer price currently used, explaining why it is likely to lead to difficulties. Your discussion should include an outline of the objectives of a sound transfer pricing system.

c) Calculate a more appropriate transfer price and demonstrate that the price calculated overcomes the difficulties identified in b).