Transfer pricing Boone 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 Boone 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. Jim Sanders, 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. Amy Mead, Aquafresh’s manager, refuses to sell the filters to Sweet Water below cost. Mr. Sanders counters that he would be happy to purchase the filters elsewhere. Because Aquafresh does not have other customers for its filters, Ms. Mead appeals to Frank Pell, the president of Boone, for arbitration.
Required

a. Should the president of Boone allow Mr. Sanders to purchase filters from outside vendors for $24 per unit? Explain.

b. Write a brief paragraph describing what Mr. Pell should do to resolve the conflict between the two division managers.