The West Coast 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 105000 units

External Sales at Rs 100 per unit 109000 units

Transfer to division Y 27000

Costs:

Variable Manufacturing cost per unit Rs 86

Variable Selling Cost per unit Rs 5 (on external sales only but not incurred on internal transfer)

Fixed Manufacturing Cost (based on 125000 units) Rs 6

Fixed Selling Cost (based on 100000 units) Rs 1

The division Y represents the following data on the assumption of volume of 27000 units.

Variable manufacturing expenses per unit Rs 98 (excluding internal transfer price/outside purchase)

Variable Selling Expenses per unit Rs 7

Fixed manufacturing cost Rs 12

Fixed selling expenses Rs 5

Selling price per unit Rs 255

Required Answers:

1. If division X could sell 125000 units at Rs 100 each in the open market what 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 as in 1 above and if selling price for division Ys product drops to Rs 200 should you buy at that price? Would this be desirable from the point of the firm, why?