The Transferico Division currently makes use of 80% of their production capacity to manufacture 80 000 units of a single product the TFC. The financial results for the past year, ended 30 June 2017, were as follows

The division is unsure whether or not to keep their selling and production strategies the same for the next year. A 10% increase in variable cost and a 5% increase in fixed cost are expected, although selling and marketing expenses per product will remain unchanged. The marketing manager has done research into the TFC product and noted that the demand for the product is price sensitive. The estimated demand for the product next year at related selling prices are as follows

Another division, The Grab-em Division has expressed interest in buying 40 000 units (no more, no less) of the the TFC product from the Transferico Division. A saving of 2% in respect of selling and marketing expenses is expected for these 40 000 units if transferred internally. The Grab-em Division can buy the TFC product in the external market at a cost of NS 2 000 per product.

**Required:**

a) Assume that the Transferico Division has ample idle capacity to handle all of the Grab—em Division’s needs. With justification, determine the transfer price range between the two divisions? [6]

b) Ignoring the possibility of internal sales, devise a sales strategy for Transferico Division that maximise the division profits next year?

c) Assume that the division implemented the strategy you determined in (b) above. Based on you sales strategy calculated in b, what is the minimum price for the division that will lead to goal congruence for the company as a whole? [11]

d) What is the maximum price the division can charge when transferring to the Grab-em Division

## 1 Answer