The First Division (FD) and the Last Division (LD), the only sub-units of Roodan Company, have the following incremental operating costs:

FD : PHP 120 per unit

LD : PHP 140 per unit

There is no physical loss in converting FD output into LD output. After processing, FD sells its output to outsiders at PHP 300 per unit; while LD sells its output at PHP 400 per unit.

FD and LD performances are assessed as though they were independent of each other.

1. Explain why a transfer price at 125% of incremental costs is improper.
2. Indicate and explain what the proper transfer price should be.