section c

Portable garage co (mar/jun 18)
c) The minimum transfer price per unit is set by the transferring division i.e. division A. It is the marginal cost plus the lost contribution from not being able to sell externally. In this instance, it is 7 plus (15-7-1) 7 which is 14.

Currently, a total of 350000 adaptors are being sold by division A out of which 200000 are external sales. The remaining 150000 adaptors are being sold to division B out of division B’s total demand of 180000 adaptors. So the division B requires 30000 more adaptors. If division A sells these 30000 additional adaptors to division B, then it would have to move away its external sales of adaptors of 30000 to selling these to division B. This would decrease division A’s external sales to 170000. In order for division A to be no worse off by selling these 30000 adaptors to division B, it would have to charge a price that covers for its external sales loss plus its current cost of manufacturing adaptors. This would be the minimum transer price.

Is the above answer enough for full marks