The Baron Company consists of 2 divisions that trade extensively with each other. The relevant revenue and cost functions for the final product are given below:

where R is the unit revenue of the final product, C m is the unit cost incurred by the supplier division in making the product and Cd is the unit cost function associated with the distribution and sale of the final product by the user division. Q is the quantity of product transferred.
Required:

(a) to determine the optimal output level to maximize Baron's profit, and the transfer price consistent with this level;

(b) to show the profits of each division at the optimal solution;

(c) to show the profits for each division and the transfer prices associated with:
(i) the supplier acting as an internal monopolist;
(ii) the user acting as an internal monopsonist;

(d) to show the effect on divisional profits when the supplier's unit cost (C_m) is:
(i) 99 (ii) 107 - 0.1Q instead of 19 + Q

(e) Given the results of

(d) above, what might the supplier contemplate doing to improve his profit performance?

(f) From the perspective of business strategy, what action would you suggest that Baron take?

Transcribed Image Text:

R = 205 - 0.5Q 19+ Q Cm = Ca === 10+ 0.7Q (1) (2) (3)