Fatim Ltd operates two divisions: Marco Division and Salle Division. The Marco Division manufactures and sells product M7.

The company's current policy is to sell M7 internally to Salle Division first before selling them to external customers. Unlimited quantities of M7 can be purchased from or sold to the external market at $585 per unit. The Salle Division could only further process and sell 104,000 units of M7 to external customers at $1,040 per unit.

The maximum capacity of both Marco and Salle Division is 130,000 units per year. Marco Division produced at full capacity and sold all the balance of the units that were not taken up by Salle Division to external customers currently.

The estimated unit costs of manufacturing in the Marco and Salle Division are as follows:

Marco Salle Division Division Direct materials $195 $54* Direct labour 78 81 Variable overheads 117 65 Fixed allocated overheads based on the maximum 65 78 capacity * Exclude internal transfer costs