Alfa Ltd has two divisions, A and B. A division is currently operating at full capacity. It has been asked to supply its product to division B. Division A sells its product to its regular customers...

Alfa Ltd has two divisions, A and B. A division is currently operating at full capacity. It has been asked to supply its product to division B. Division A sells its product to its regular customers for `30 each. Division B (currently operating at 50 per cent capacity) is willing to pay `20 each for the component produced by division A (this represents the full absorption cost per component at division A). The components will be used by division B in supplementing its main product to conform to the need of special order. As per the contract terms of sale, the buyer calls for reimbursement of full cost to division B, plus 10 per cent. Division A has a variable cost of `17 per component. The cost per unit of division B subsequent to the buying part from division A is estimated as follows:

The company uses return on investment in the measurement of divisional and division manager’s performance.

REQUIRED:

(a) As manager of division A, would you recommend sales of your output to division B at the stipulated price of `20?

(b) Would it be in the over-all interest of the company for division A to sell its output to division B?

(c) Suggest an alternative transfer price and show how could it lead to goal congruence?