2014 June -Questin 03- (b)

Sir,

Please help to solve this question,

C Co is currently working to full capacity. The Rotech group’s policy is that group companies and divisions must always make internal sales first before selling outside the group. Similarly, purchases must be made from within the group wherever possible. However, the group divisions and companies are allowed to negotiate their own transfer prices without interference from Head Office.
C Co has always charged the same price to the Gearbox division as it does to its external customers. However, after being offered a 5% lower price for similar components from an external supplier, the manager of the Gearbox division feels strongly that the transfer price is too high and should be reduced. C Co currently satisfies 60% of the external demand for its components. Its variable costs represent 40% of revenue.
Required:
Advise, using suitable calculations, the total transfer price or prices at which the components should be supplied to the Gearbox division from C Co.

Thank you.