Transfer pricing, goal-congruence. The $ather Corporation manufactures and sells 10,000 boom boxes. It buys the cassette deck for the boom box from the Cassette Deck Division.

The Cassette Deck Division is operating at capacity and producing 12,000 cassette decks.

The demand for cassette decks is strong. Any cassette deck not sold to the Assembly Division can be sold in the outside market for $42 per unit. The Cassette Deck Division currently sells 10,000 cassette decks to the Assembly Division and 2,000 cassette decks in the outside market. The incremental cost ofmanufacturing the cassette deck is $30 per unit.

A crucial component for producing high-quality cassette decks is the (cassette) head mechanism. The Cassette Deck Division manufactures the head mechanism for its cassette decks. Many outside suppliers have offered to supply cassette decks to $ather. To ensure qual¬

ity, $ather requires that any outside supplier wanting to supply cassette decks to $ather must purchase the head mechanism from the Cassette Deck Division. The Cassette Deck Division’s incremental cost of manufacturing the head mechanism is $14.40 per unit. The Cassette Deck Division will charge $21.60 per unit for the head mechanism. The Cassette Deck Division has excess manufacturing capacity for manufacturing the head mechanism, ti hat is, even if the Cassette Deck Division manufactures the head mechanism for outside suppliers, it will still be able to manufacture and sell 12,000 cassette decks for sale in the outside market at $42 per unit.

Johnson Corporation, an outside supplier, is currently negotiating to supply 10,000 cassette decks to the Assembly Division for a price in the range of $44.40 to $51.60. If Johnson gets the business it will buy the head mechanism from the Cassette Deck Division for $21.60 per unit.
Required 1. From the standpoint of Sather Corporation as a whole, should the Assembly Division accept Johnson Corporation’s offer at

(a) a price of $44.40 per cassette deck?

(b) a price of $51.60 per cassette deck? $how all calculations.
2. What transfer price for cassette decks will result in the Cassette Deck Division and the Assembly Division taking actions that are optimal for Sather Corporation as a whole?
Explain your answer.