HCA Ltd has two Divisions, Division A and Division B, that manufacture vacuum cleaners. Division A produces the internal components for the vacuum cleaner and sells them to Division B. Division B assembles the vacuum cleaner using the components received from Division A. There is a competitive external market for the products produced in both Divisions. Each Division has been designated as a profit centre. The transfer price for the internal components has been set at the long-run average market price. The following data are available for each Division: Selling price for final product (vacuum cleaner) $650 Long-run average market price for intermediate product (internal components) 320 Incremental cost per unit for completion in Division B 340 Incremental cost per unit in Division A 220

Required: 1. From the perspective of Division B, should a transfer of 2,000 internal components be made to Division B if there is no unused capacity in Division A?

2. Assume that Division As maximum capacity for this product is 2,000 internal components per month and sales of the intermediate market are 1,600 internal components.

a) What is the range of transfer prices within which both Divisions' operating income would increase as a result of agreeing to the transfer of 400 internal components per month from Division A to Division B?

b) Assume that the manager of Division A has the option of: (i) cutting the external price to $310, with the certainty that sales will rise to 2,000 internal components; or (ii) maintaining the external price of $320 for the 1,600 internal components and transferring the 400 internal components to Division B at a price that would produce the same operating income as alternative (i) for Division A. What transfer price would produce the same operating income for Division A?