Wollongong Ltd has two divisions that are involves in the internal transfer of products. Generaly, division m1 transfer the partially process components to division m2. Division m2 sells the finished goods produced for the external customers for $300 unit

currently m1 is required by its manager to transfer its annual output of 5000 unit at the local manufacturing cost plus 20% . M1 could also sell these components to outside buyers at $180per unit on the open market

the cost structure for both the division is as follows-

Division m1. Division m2

direct material. $24. $12

direct labour. $32. $40

manufacturing overhead. $64. $50

note 1 - manufacturing overhead for division m1 is 25% variable and 75% fixed

note 2 - manufacturing overhead for division m2 is 50% variable and 50% % fixed

required-

a) the manager of m1 division is not pleased with the current arrangement of transferring 5000 units at the stipulated cost explain and show necessary calculation (5 mark)

b) using the market price as the transfer price calculate the contribution margins for both division(5 mark)

c) independent of the above assume that division m1 has limited capacity if it supplied the required 500 units to the m2 division it would have to for go production and sales of 400 units to external customers .the external sales generally provide a contribution of $ 120 per unit use the general rule to recommend the transfer price