Yellow Group is a highly decentralized company. Each divisional manager has full authority for sourcing decisions and selling decisions. Bonus will be given to divisional managers based on their divisional profitability.

Zipper Division of Yellow Group supplies 100,000 zippers per month to Bag Division who uses it for producing a standard design of bag. The transfer price of zipper is $8, which is the market price. However, Zipper Division does not operate at or near capacity. The variable cost of zipper is $4.8.

In addition to the zipper cost, the variable cost incurred by Bag Division is $12 per bag. The selling price of a bag is $32.

The manager of Bag Division is considering a promotional campaign. The market research department has developed the following estimates of additional monthly volume associated with additional monthly promotional expenses.

	Option A	Option B	Option C
Additional monthly expenses	$80,000	$120,000	$163,200
Additional monthly sales volume of bags	10,000	15,000	18,000

Discuss a transfer pricing scheme that would be acceptable by the group and both divisional managers? 6 marks