Pricing in imperfect markets (continuation of 23-38). Refer to Problem 23-38. ©

1. Contribution from external REQUIRED sale, $90,000 1. Suppose the manager of Frames Division 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 Seats Division at some price that would produce the same operating income for Frames Division. What transfer price would produce the same operating income for Frames Division? 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 products is dropped to $234, outside sales can be increased to 900 units. Seats Division wants to acquire as many as 200 units if the transfer price is acceptable. For simplicity, assume there is no outside market for the final 100 units of Frames Division’s capacity.

a. Using the general guideline, what is (are) the minimum transfer price(s) that should lead to the correct ecorfomic 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.

LO1