Oscroft Company makes household water filtration equipment. The Aquafresh Division manufactures filters. The Sweet Water Division then uses the filters as a component of the final product Oscroft sells to consumers. The Aquafresh Division has the capacity to produce 8,000 filters per month at the following cost per unit:

Sweet Water currently uses 6,000 Aquafresh filters per month. Andy Treadway, Sweet Water's manager, is not happy with the $30 transfer price charged by Aquafresh. He points out that Sweet Water could purchase the same filters from outside vendors for a market price of only $24.
Denise Cantor, Aquafresh's manager, refuses to sell the filters to Sweet Water below cost. Mr. Treadway counters that he would be happy to purchase the filters elsewhere. Because Aquafresh does not have other customers for its filters, Ms. Cantor appeals to Jim Volcker, the president of Oscroft, for arbitration.
Required

a. Should the president of Oscroft allow Mr. Treadway to purchase filters from outside vendors for $24 per unit? Explain.
b. Write a brief paragraph describing what Mr. Volcker should do to resolve the conflict between the two division managers.

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Variable costs $12 10 Division fixed costs Allocated corporate-level facility-sustaining costs Total cost per filter $30