The company operates two divisions: Baking and Packaging. The former manufactures two products; bread and bun dough. Bread is sold to external customers at $42 per unit. The only outlet for bun dough is Packaging. Packaging supplies an external market and can obtain its semi-finished supplier(bun dough) from either the Baking Division or an external source.

Currently, Packaging has an opportunity to purchase bun dough from an external supplier for $38 per unit. The capacity of the Baking Division is measured in units of output, irrespective of whether bread, bun dough, or a combination of both is manufactured. The associated product costs are as follows:

	Bread	Bun Dough
Variable costs per unit	$32	$35
Fixed overheads per unit	$5	$5
Total unit costs	$37	$40

Determine an appropriate transfer price for the sale of bun dough from the Bakery Division to the Packaging Division, under the following conditions:

i. When the baking Division has spare capacity and limited external demand for bread.

ii When the Baking Division is operating at full capacity with unsatisfied external demand for bread.

Required

A. Identify the purpose of transfer pricing.

B. Discuss THREE (3) problems associated with transfer pricing.

C. Elaborate on THREE (3) potential benefits of operating a transfer pricing systems.