The Jordan Company has two divisions and manufactures one type of watch. The two divisions are the production Division and the Package & Delivery Division. The production Division manufactures watches and then sells them to the Package & Delivery Division, which packs the watches and sells them to retailers. The market price for the Package & Delivery Division to purchase this watch is 40.

Productions cost per watch are:
Direct materials	6
Direct labour	7
Variable overhead	5
Division fixed cost	2

Package & Deliverys cost per watch are:
Direct materials	9
Direct labour	3
Variable overhead	4
Division fixed cost	16

Notes: Fixed costs shown above are per pair for 100,000 units.

Required:

a) If Production Division has excess capacity to produce 100,000 watches which it cannot sell externally, must it negotiate a transfer price below 40 per watch internally? If the production division cannot negotiate the appropriate transfer price with internal package and delivery division, what is the consequence of this? Explain