Storage Pty. Ltd., has two sections, A and B that manufacture expensive cages. Section A produces the cage frame, and Section B adds a roof onto the cage. There is a market for both the subassembly and the final product. Each Section has been designated as a profit centre. The transfer price for the subassembly has been set at the long-run average market price. The following data are available for each Section:

$360 275 Selling price for final product Long-run average selling price for intermediate product Incremental cost per unit for completion in Section B Incremental cost per unit in Section A 120 90 Required: 1. Should transfers be made to Section B if there is no unused capacity in Section A? Show your computations and explain your conclusion. (3 marks) 2. Assume that Section A's maximum capacity for this product is 1,200 units per month and sales to the intermediate market are now 900 units. Assume that for a variety of reasons, Section A will maintain the $275 selling price indefinitely. That is, Section A is not considering lowering the price to outsiders even if idle capacity exists. a) What is the minimum transfer price that the first 300 units should be transferred to Section B? b) What is the maximum transfer price that the first 300 units should be transferred to Section B? c) What is the transfer price that the remaining 900 units should be transferred to Section B? d) Explain why these transfer prices (in a), b) and c)) will be different? (5.5 marks) 3. If the Section B manager can purchase the cage frame from an outside supplier at $200 plus a variable purchasing cost of $10 per cage frame, what is the maximum transfer price at which the division B manager will be willing to purchase cage frames from division A? (1 mark) 4. Suppose now that the long-run average selling price for the intermediate product is $260 and to sell the intermediate product would incur $10 selling costs per unit. Also suppose that the incremental cost per unit in Section A is $100 and that Section A has no spare capacity. What is the opportunity cost of transferring 300 units to Section B? (2 marks)