Light House Ltd. has two divisions. The battery division manufactures and sell batteries to the external market at a price of $5.00 per battery. It currently operates at optimal capacity supplying 10,000 batteries to the outside market at a variable cost of $3 per battery. The fixed cost per unit is $1 (based on optimum capacity). The other division is the torch-light division which purchases batteries in the external market at a price of $4.75 per battery. The both divisions are evaluated based on divisional profits. The torch-light division would like to begin purchasing batteries from the battery division. The torch-light division requires 1,000 batteries.

Required:

1. What is the lowest transfer price that the battery division would accept?

2. What is the highest transfer price that the torch-light division would accept?

3. Do you expect the two division managers to be able to agree on an appropriate transfer price?

4. From the viewpoint of the company as a whole, should a transfer take place?