1. Blue Manufacturing Corp has two facilities--one in Ann Arbor, and one in Dearborn. Both divisions are run as profit centers. Ann Arbor makes product AA-2, whereas Dearborn makes product DB-3. Both products use a 1/4 inch sheet of Aluminum as a raw material, and hence both Ann Arbor and Dearborn each keep stock of Aluminum sheets.

Dearborn has been experiencing high demand for DB-3 and currently is out of stock of Aluminum. The normal supplier Dearborn uses is out of stock as well, though Ann Arbor has plenty of sheets of Aluminum on the shelf--enough that given current demand for AA-2s, there will be more than enough left over to share with Dearborn. Assume each sheet cost Ann Arbor $100 from its supplier, and that Dearborn has a delivery truck that could drive out to Ann Arbor to pick up the material.

Why might Ann Arbor NOT be willing to sell the sheets to Dearborn at $100 per sheet? Provide at least 2 reasons.

2. Dearborn sells a different product called a DB-1. To make a DB-1, Dearborn needs to buy an AA-1 from Ann Arbor as a component to the finished product. AA-1s are only used to make DB-1s--they have no other purpose.

Dearborn is forecasting demand of 500-1000 DB-1s, but Ann Arbor currently only has enough capacity to make 500 AA-1s. Thus, if more than 500 orders for DB-1s come in, Dearborn will be constrained and only able to sell 500. Thus, Dearborn wants Ann Arbor to lease an additional machine capable of making an additional 500 AA-1s. The equipment rental company will charge Ann Arbor $50,000 to lease the machine for the period. If Dearborn is able to get orders for 800 DB-1s, how much of the $50,000 lease should it reimburse Ann Arbor through a transfer payment. Answer in dollars.