Avon Ltd. with two manufacturing divisions is organised on profit centre basis. Division A is the only source for the supply of a component that is used in division B in the manufacture of a product,...

Avon Ltd. with two manufacturing divisions is organised on profit centre basis. Division A is the only source for the supply of a component that is used in division B in the manufacture of a product, KLIM. One such part is used in each unit of the product, KLIM. As the demand for the product is not steady, division B can obtain orders for increased quantities only by spending more on sales promotion and by reducing the selling prices. The manager of division B has accordingly prepared the following forecast of sales quantities and selling prices:

The manufacturing cost of KLIM in division B is `37,500 for the first 1,000 units and `7,500 per 1,000 units in excess of 1,000 units. Division A incurs total cost of `15,000 per day for an output upto 1,000 components, and the total costs will increase by `9,000 per day for every additional 1,000 components manufactured. The manager of division A states that the operating results of his division will be optimised if the transfer price of component is set at `12 per unit, and he has accordingly set the aforesaid transfer price for his supplies of the component to division A.