DIVISION A

Division A, which is a part of the ACF Group, manufactures only one type of product, a Bit,
which it sells to external customers and also to division C, another member of the group. ACF
Group’s policy is that divisions have the freedom to set transfer prices and choose their
suppliers.
The ACF Group uses residual income (RI) to assess divisional performance and each year it
sets each division a target RI. The group’s cost of capital is 12% a year.
Division A
Budgeted information for the coming year is:
Maximum capacity 150,000 Bits
External sales 110,000 Bits
External selling price $35 per Bit
Variable cost $22 per Bit
Fixed costs $1,080,000
Capital employed $3,200,000
Target residual income $180,000
Division C
Division C has found two other companies willing to supply Bits:
X could supply at $28 per Bit, but only for annual orders in excess of 50,000 Bits. Z could
supply at $33 per Bit for any quantity ordered.

aii) Calculate the two prices division A would have to quote to division C, if it
became group policy to quote transfer prices based on opportunity costs

for this part why haven’t we solved like this?
Minimum transfer price

MC (internal sales) 22X60000= 1320000
OC (contribution lost external sales)= (35-22)X20000= 260000
total Transfer Price 1580000

but again for per unit transfer price which units should i take?