Steelframe Corporation has two divisions. The Division-X makes Product A, which is then transferred to Division-Y. The Product A is further processed by the Division-Y and is sold to customers at a price of Rs.150 per unit. Division-X is currently required by Steelframe to transfer its total yearly output of 200,000 units of Product A to Division-Y at 110% of full manufacturing cost. Unlimited quantities of Product A can be purchased and sold on the outside market at Rs.90 per unit.

The following table gives the manufacturing cost per unit in the Divisions-X&Y for 2019:

	Division-X	Division-Y
Direct Material Cost	Rs. 12	Rs. 6
Direct Manufacturing Labour cost	Rs. 16	Rs. 20
Manufacturing Overhead Cost	Rs. 32*	Rs. 25**
Total Manufacturing Cost per unit	Rs. 60	Rs. 51

*Manufacturing overhead costs in the Division X are 25% fixed and 75% variable.

**Manufacturing overhead costs in the Division Y are 60% fixed and 40% variable.

Required:

1. Calculate the operating incomes for Division-X and Division-Y for the 200,000 units of Product A transferred under the following transfer-pricing methods: (a) market price and (b) 110% of full manufacturing cost.

2. Suppose Steelframe rewards each division manager with a bonus, calculated as 2% of division operating income (if positive). What is the amount of bonus that will be paid to each division manager under the transfer-pricing methods in requirement 1? Which transfer-pricing method will each division manager prefer to use?

3. What arguments would Sheetal Verma, manager of the Division-X, make to support the transfer-pricing method that she prefers?