QUESTION ABOUT TRANSFER PRICING.

Motor Mobile Enterprises (MME) designs, manufactures and sells speciality motion control components for use in specific medical robotic equipment. MME has two manufacturing divisions:

• motor division
• medical applications division.

The motor division produces electric motors, 10 per cent of which are sold to the medical applications division of MME. Eighty percent (80%) of motors are sold to outside customers. MME treats both divisions as investment centres and allows division managers to choose their sources of sale and supply. The motor division's estimated sales and standard cost data for the year ending 31 December, based on the capacity of 100 000 units, are as follows:

To the medical applications To outside customers division Sales $250 000 $ 4 000 000 Variable manufacturing costs (225 000) (1 800 000) Variable selling costs (240 000) Applied fixed costs (200 000) (600 000) Gross margin (150 000) 1 600 000 Unit sales 10 000 80 000