Question
A company produces a single product at two locations. Division A produces the product at a constant marginal cost of $10 per unit and has
A company produces a single product at two locations. Division A produces the product at a constant marginal cost of $10 per unit and has additional capacity to spare. Division B is experiencing a significant manufacturing problem and is temporarily not able to produce. As a result, Division B would like to purchase units from Division A to satisfy its local demand, which is defined by the following demand curve: P = 110 - 5Q. As the CFO of the entire company who knows Division A's marginal cost and Division B's demand curve, (1) what transfer price will you set, and (2) at this price, how many units should Division B purchase?
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