Transfer Pricing KingXY Ltd is organised on decentralized lines, with each manufacturing division operating as a separate profit centre. The manager of a division has full authority to decide on sale of the divisions output to outsiders and to other divisions. Division Y has always purchased its requirements of a component from Division X. But when informed that Division X was increasing its selling price to R300, the manager of Division Y decided to look at outside suppliers. Division Y can buy the component from an outside supplier for R270. But Division X refuses to lower its price in view of its need to maintain its return on the investment. The following information are also available: Xs variable costs per unit R240, Xs fixed cost per unit R40 and Ys annual purchase of the component is 500 units

Required: 4.1 Will the company as a whole benefit, if Division Y bought the component at R270 from an outside supplier? (5 marks)

4.2 If Division X did not produce the material for Division Y, it could use the facilities for other activities resulting in a cash operating savings of R20,000. Should Y then purchase from outside sources? (5 marks)

4.3 Suppose there is no alternative use of Xs facilities and the market price per unit for the component drops by R35. Should Y now buy from outside? (5 marks) 4.4 The manager of Division X has been asked to vary the method used to determine the transfer price. However, she is not aware of the methods used to determine transfer price. Briefly explain the various methods the manager of Division X could use to set the transfer price. Based on the circumstances, recommend which method can suit Division X. (5 marks)