Rajdeep Scooters is organized as multiple divisions. All divisions are profit centers. The Engine Division manufactures two-stroke engines used by the assembly division. The market price of the engine is Rs. 18,000. (Rs. Stands for rupees, the currency in India.) The division€™s cost sheet contains the following information about an engine€™s cost:

Required:
a. What would be the transfer price if the company uses a policy of setting the transfer price at variable cost plus a 20% markup?
b. What would be the transfer price if the company uses a policy of setting the transfer price at full cost plus 10% markup?
c. Comment on whether either of the above two estimates would be a €œfair€ transferprice.

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Item Cost Direct mteris Rs. 6,000 Direct labor Variable overhead Fixed overhead 3,000 1,000 2.000