Problem 13.6 (Transfer Pricing-Unutilized capacity - Sub-optimal decision). Betagro Ltd. which has a system of assessment of divisional performance on the basis of Residual Income has two divisions Alfa and Beta. Alfa has annual capacity to manufacture 15 lakhs nos. of a special component which it sells to outside customers; but has idle capacity. The budgeted residual income of Beta is Rs. 120 lakhs while that of Alfa is Rs. 100 lakhs. Other relevant details extracted from the Budget of Alfa for the year are : Sale (to outside customers) 12 lakhs units @ Rs. 180 per unit Variable Cost per unit Rs. 160 Divisional Fixed Cost Rs. 80 lakhs Capital Employed Rs. 750 lakhs Cost of Capital 12% Beta has just received a special order for which it requires components similar to the ones made by Alfa. Fully aware of Alfa's unutilised capacity, Beta has asked Alfa to quote for manufacture and supply of 3,00,000 numbers of the components with a slight modification during final processing. Alfa and Beta agree that this will involve an extra variable cost of Rs. 5 per unit. (i) Calculate the transfer price which Alfa should quote to Beta to achieve its budgeted residual income. (ii) Indicate the circumstances in which the proposed transfer price may result in a sub-optimal decision for the Betagro group as a whole