Ruce Ltd. has two manufacturing divisions located in the same plant. Division X is evaluated as a cost centre, and Division Y is evaluated as a profit centre.

Division X produces component X98 at a budgeted full cost of $108 per unit, of which $100 represents variable costs. Currently, Division X is operating at full capacity and transfers all of its output to the sales division at $108 per unit. The sales division sells component X98 to external customers for $133 per unit; it incurs variable costs of $9 per unit to sell the component.

Division Y purchases a component similar to X98 from an outside supplier for $125/unit plus a $2 per unit delivery charge. Ruce Ltd.’s production engineers have determined that component X98 could be used by Division Y with no adverse effects on the quality of the final product. Assume that no selling or delivery expenses would be incurred for internal transfers. What is the highest transfer price per unit that Division Y should be willing to accept for component X98?

a. $133

b. $124

c. $125

d. $108

e. $127