The Omega group comprises two companies, A Ltd and B Ltd both of which are resident in a country where the corporate tax rate is at 30%.

A Ltd

A Ltd has two divisions:

(i) Engineering division provides engineering services to the oil & gas industry.

(ii) Manufacturing division assembles commercial refrigerators which it sells to supermarkets and convenience stores. The storage racks used in these commercial refrigerators are purchased from B Ltd.

B Ltd

B Ltd manufactures storage racks that are sold globally. Some of the storage racks are sold to A Ltd. Over the years, B Ltd had built up a strong presence in many countries and had emerged as the market leader in this industry. Given the way B Ltd currently operates, it is at its maximum capacity.

(ii) An analysis of the market demand shows that B Ltd currently satisfies only 80% of the external demand for its storage racks. Explain, with appropriate calculations, the minimum transfer price or prices at B Ltd at which it would be willing to supply the storage racks internally. State any necessary assumption(s) you have to make.

The financial results of the two companies for the year ended 31 December 2017 are as follows: ($ 000) External sales Sales to A Ltd A Ltd B Ltd Engineering Manufacturing Division Division 700 1.270 400 350 750 230 900* 250 270 210 120** 200 160 380 800 2,000 4,000 Cost of sales General & Admin expenses Operating Profit Assets * Includes the costs of storage racks purchased from B Ltd. ** The general and admin expenses for B Ltd is fixed with respect to sales. The financial results of the two companies for the year ended 31 December 2017 are as follows: ($ 000) External sales Sales to A Ltd A Ltd B Ltd Engineering Manufacturing Division Division 700 1.270 400 350 750 230 900* 250 270 210 120** 200 160 380 800 2,000 4,000 Cost of sales General & Admin expenses Operating Profit Assets * Includes the costs of storage racks purchased from B Ltd. ** The general and admin expenses for B Ltd is fixed with respect to sales