Problem 13.12 (Proposed transfer price at marked price less 25%). L Ltd. and M Ltd. are subsidiaries of the same group of companies L Ltd produces a branded product sold in drums (10,000 in number) at a price of Rs. 20 per drum. Its direct product costs per drum are: -Raw material from M Ltd. At a transfer price of Rs. 9 for 25 liters. -Other products and services from outside the group: At a cost of Rs. 3. L Ltd's fixed costs are Rs. 40,000 per month. These costs include process labour whose costs will not alter until L Ltd's output reaches twice its present level. A market research study has indicate that L Ltd's market could increase by 80% in volume if it were to reduce its price by 20%. M Ltd produces a fairly basic product which can be converted into a wide range of end-products. It sells one third of its output of L Ltd and the remainder to customers outside the group. M Ltd Ltd production capacity is 1,000 kiloliters per month, but competition is keen and it budgets to sell not more than 750 kiloliters per months for the year 31st December 1990. Its variable costs are Rs. 200 per kilolitre and its fixed costs are Rs. 60,000 per months. The current policy of the group is to use market prices, where known, as the transfer price between its subsidiaries. This is the basis the transfer price between M Ltd and L Ltd. You are required (a) to calculate the monthly profit position for each of L Ltd and M is sales of L Ltd are: (i) at their present level, and (ii) at the higher potential level indicated by the market research, subject to a cut in price of 20%. (b) to explain why the use of market price as the transfer price produces difficulties under the conditions outlined in (a) () above: (c) to recommend, with supporting calculations, what transfer price you would propose