Division 1 sells one of its products to Division 2. The product cost is 160 for materials, 60 for direct labour, 10 for variable overheads and 110 for fixed overheads. Division 1 sets the profit margin equal to 40% of the variable cost. With a variable cost transfer price policy, what is the transfer cost if Division 1 is operating at less than full capacity?

1. 340

2. 230

3. 160

4. 432