Transfer pricing, goal-congruence. Johnson Farming Equipment Corp. manufactures and @ 0 sells heavy farm equipment. One of its divisions assembles 1,000 tractors per year. It buys the 4 Net cosis, buy wheels wheels from another division. The Wheels Division is operating at capacity and producing — at $444, $228,000 1,200 wheels. The demand for special-dimension wheels is strong. Any wheel not sold to the Tractors Division can be sold in the outside market for $420 per unit. The Wheels Division currently sells 1,000 wheels to the Tractor Division and 200 wheels in the outside market.

The incremental cost of manufacturing each wheel is $300.

A crucial component for producing good-quality wheels is the rubber component. The Wheels Division thermoforms the rubber component for its wheels. Many outside suppliers have offered to supply the rubber component already thermoformed to Johnson. ‘To ensure quality, Johnson requires that any outside supplier wanting to supply wheels to Johnson's divisions must purchase the thermoformed rubber component from the Wheels Division. The Wheels Division’s incremental cost of thermoforming the rubber component is $144 per unit. The Wheels Division will charge $216 per unit for the wheels’ rubber component.

The Wheels Division has excess manufacturing capacity for thermoforming the rubber component of wheels. That is, even if the Wheels Division thermoforms wheels’ rubber components for outside suppliers, it will still be able to manufacture and sell 1,200 wheels in the outside market at $420 per unit.

Molson Corporation, an outside supplier, is currently negotiating to supply 1,000 wheels to the Tractor Division for a price in the range of $444 to $516. If Molson gets the business it will buy the wheels’ rubber component from the Wheels Division for

$216 per unit.

REQUIRED 1. From the standpoint of Johnson Farming Equipment as a whole, should the ‘Tractor Division accept Molson’s offer at

(a) a price of $444 per wheel?

(b) a price of $516 per wheel?

Show all calculations.

2. What transfer price for wheels will result in the Wheels Division and the Tractor Division taking actions that are optimal for Johnson Corporation as a whole? Explain your answer.

LO1