The Royal Industries Ltd has two divisions, A and B. Division A manufactures product X which it sells in an outside market as well as to division B, which processes it to manufacture Z. The manager of...

The Royal Industries Ltd has two divisions, A and B. Division A manufactures product X which it sells in an outside market as well as to division B, which processes it to manufacture Z. The manager of division B has expressed the opinion that the transfer price is too high. The two divisional managers are about to enter into discussions to resolve the conflict, and the manager of division A wants you to supply him with some information prior to the discussions. Division A has been selling 40,000 units to outsiders and 10,000 units to division B, all at `20 per unit. It is not anticipated that these demands will change. The variable cost is `12 per unit and the fixed costs are `2 lakh. The manager of division A anticipates that division B will want a transfer price of `18. If he does not sell to division B, `30,000 of fixed costs and `1,75,000 of assets can be avoided. The manager of division A would have no control over the proceeds from the sale of the assets and is judged primarily on his rate of return. The firm’s existing assets are of `8 lakh. (a) Should the manager of division A transfer its products at `18 to division B? (b) What is the lowest price that the division A should accept? Support your decision with detailed calculations.