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Question $2$

The Slate Company manufactures and sells television sets. Its assembly division $($AD$)$ buys

television screens from the screen division $($SD$)$ and assembles the TV sets. The SD$,$ which is

operating at capacity, incurs an incremental manufacturing cost of $$65$ per screen. The SD can sell

all its output to the outside market at a price of $$100$ per screen, after incurring a variable marketing

and distribution cost of $$8$ per screen. If the $AD$ purchases screens from outside suppliers at a price

of $$100$ per screen, it will incur a variable purchasing cost of $$7$ per screen. Slate's division

managers can act autonomously to maximize their own division's operating income.

Required:

What is the minimum transfer price at which the SD manager would be willing to sell

screens to the AD$?$

What is the maximum transfer price at which the AD manager would be willing to purchase

screens from the SD$?$

Now suppose that the SD can sell only $70\%$ of its output capacity of $20,000$ screens per month

on the open market. Capacity cannot be reduced in the short run. The AD can assemble and

sell more than $20,000$ TV sets per month.

a$.$ What is the minimum transfer price at which the SD manager would be willing to sell

screens to the AD$?$

$30\%.70\%$

b$.$ From the point of view of Slate's management, how much of the SD output should be

transferred to the AD$?$

c$.$ If Slate mandates the SD and AD managers to "split the difference" on the minimum and

maximum transfer prices they would be willing to negotiate over, what would be the

resulting transfer price? Does this price achieve the outcome desired in requirement $3b?$

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