The Top Company Ltd has two divisions X & Y. One of the parts produced by X is

being used by Division Y in its manufacturing process. This part is not unique and there

is readily defined market such that X can sell to outside firms and Y can buy from

outside. The following data is available in respect of division X:

Capacity to Produce the part-125000 units

External Sales at-TZS 1,000 per unit 100000units

Transfer to division Y- 25000 units

Costs:Variable Manufacturing cost per unitTZS 840

Variable Selling Cost per unitTZS20

(on external sales only but not incurred on internal transfer)

Fixed Manufacturing Cost (based on 125000 units)TZ60

Fixed Selling Cost (based on 100000units)TZ10

The division Y represents the following data on the assumption of volume of 25000 units.

Costs:Variable manufacturing expenses per unitTZS1000

(excluding internal transfer price/outside purchase)

Variable Selling Expenses per unitTZS60

Fixed manufacturing costTZS1000

Fixed selling expensesTZS40

Selling price per unitTZS2400

Required

1. If division X could sell 125000 units at TZS 1,000 each in the open market, basing on the general rule of transfer pricing what is the minimum transfer price the central management would prefer in order to provide proper motivation to division Y?
2. As a management accountant would you advise division Y to buy the product at the transfer price determined in 1 above?
3. Assume transfer price in 1 above is used and the selling price for division Y per product drops to TZS 2,000. Should you buy at that price? Would this be desirable from the point of the firm, why?