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ABC Ltd has two divisions, A and B, that manufacture washing machines. Division A produces the internal components for the washing machine and division B assembles the washing machine using the components. There is a competitive external market for both the internal components and the final product. Each division has been designated as a profit centre. The transfer price for the internal components has been set at the long-run average market price. The following data are available for each division: Selling price for final product Long-run average selling price for intermediate product Incremental cost per unit for completion in division B Incremental cost per unit in division A Required: $450 $230 $280 $150

1) Should transfers be made to division B if there is no unused capacity in division A? Show your workings.

2) Assume that division A's maximum capacity for this product is 2,000 units per month and sales to the intermediate market are now 1,200 units. Assume that for a variety of reasons, division A will maintain the $230 selling price indefinitely.

(a) Should 800 units be transferred to division B?

(b) At what transfer price? Show your workings.

3) Suppose the manager ofdivision A has the option of (a) cutting the external price to $226, with the certainty that sales will rise to 2,000 units, or (b) maintaining the external price of $230 for the 1,200 units and transferring the 800 units to division B at a price that would produce the same operating income as alternative (a) for division A. What transfer price would produce the same operating income for division A? Is that price consistent with that recommended by the general guideline? Show your workings.

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