C Inc. operates with two divisions, A and B. Currently the business of Division A is good and it operates at 90% capacity. It makes and sells Part K to outside market at $1,100 each with regular sales of 9,000 units. The variable manufacturing cost is $680 and selling commission is $11 per unit. Fixed manufacturing costs are $1,580,000.

To the contrary, the Division B is operating at 50% capacity only. To make use of the idle capacity, Division B plans to use the Part K to make a new product for 3,000 units per year. B can select to buy Part K from open market or Division A. If Division B buys Part K from Division A, no selling commission or purchasing cost is needed.

The unit cost of Bs new product is listed below:

Part K (assuming purchased outside, not from division A)	$1,100 per unit
Variable purchasing costs for Part K (assuming purchased outside)	30 per unit
Other parts from outside supplier	$2,800 per unit
Other variable costs	1,500 per unit
Allocated fixed overhead	1,000 per unit

Bs market research has shown that the new product can be sold at $6,000 per unit. All the fixed production overhead is unavoidable if the new product is produced or not.

Each division manager has full authority on all decisions regarding sales to internal or external customers. Division management is compensated based on the division's operating income.

Required:

1. a) If Division B wants to buy 1,000 units Part K from Division A at $800 per unit, whats the effect to Division As operating income? Should Division A accept or reject the proposal? (4 marks)

2. b) If Division B wants to buy all 3,000 units Part K from Division A at $800 per unit, should Division A accept or reject the proposal? Show your calculations. (6 marks)

3. c) Determine the range of transfer price (minimum and maximum transfer price) that would be accepted by both Divisions for Part K. (6 marks)

4. d) Assume that Division A insists on a transfer price of $1,100 for all 3,000 units Part K and Division B accept. Is Division Bs decision in the best interest of whole company? Support your answer with figures. (5 marks)

5. e) Suppose C Inc. requires that whenever divisions transfer products internally, the transfer price must be set as the variable manufacturing costs. Evaluate the effectiveness of this transfer price in i. evaluating division performance

   ii. promoting goal congruence