Pricing in imperfect markets (continuation of 23-29). Refer to Problem 23-29.

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Required 1. Suppose the manager of Division A has the option of

(a) cutting the external price to $234 with the certainty that sales will rise to 1,000 units or

(b) maintaining the outside price of

$240 for the 800 units and transferring the 200 units to Division B at some price that would produce the same operating income for Division A. What transfer price would produce the same operating income for Division A? Does that price coincide with that recommended by the general guideline in the chapter so that the desirable decision for the company as a whole would result?

2. Suppose that if the selling price for the intermediate product is dropped to $234, outside sales can be increased to 900 units. Division B wants to acquire as many as 200 units if the transfer price is acceptable. For simplicity, assume that there is no outside market for the final 100 units of Division A’s capacity.

a. Using the general guideline, what is (are) the minimum transfer price(s) that should lead to the correct economic decision? Ignore performance evaluation considerations.

b. Compare the total contributions under the alternatives to show why the transfer price(s) recommended lead(s) to the optimal economic decision.