Problem 13.7 (Selling price to be selected for maximising profit for the company as a whole- No intermediate external market). M/s Foamstar have two divisions Foam and Star. Foam manufacturers an intermediate product for which there is no intermediate external market. Star incorporates this intermediate product into the final product which it sells. One unit of the intermediate product is used in the production of the final product. The expected units of the final product which Star division estimates it can sell at various selling prices are as follows: Net Selling Price Quantity Sold Rs. (Units) 1,000 10,000 900 20,000 800 30,000 700 40,000 600 50,000 500 60,000 The costs of each division are as follows: Foam Star Variable cost per units (Rs.) 110 70 Fixed costs per annum (Rs.) 60,00,000 90,00,000 The transfer price is Rs. 350 for the intermediate product and is determined on a full cost-plus basis. You are required to: (a) Prepare profit statements for each division and the company as a whole for the various selling prices. (b) State which selling price maximise profit for the Star division and the company as a whole and comment on why the latter selling price is not selected by Star Division. (C) State which transfer pricing policy will maximise the company's profit under a divisional organisation