Johnny C. has two divisions. East division sells a component (L689) to West division. West then assembles a product, CAGE, using L689 and sells it to customers. East division incurs $50 of variable cost per unit of L689 and allocates $80 of fixed cost to each unit. Easts factory has limited space, so every unit of L689 it produces means one less unit of L690 is made. While L689 is only sold to West division, East division sells L690 to outside customers for $150 per unit while incurring $40 in variable cost per unit. In addition to the cost of L689, West division incurs $90 in variable cost and $100 in allocated fixed cost to make each unit of CAGE, which sells for $502. If necessary, West could contract with an outside supplier for a slightly different part, M777, that costs $200 per unit and would require an additional $25 in cost to convert it into an equivalent of L689. It will be in the best interest of Johnny C for the transfer to occur.

a) What is the lowest transfer price that will ensure that both divisions will voluntarily participate in the transfer (ie, if the price was lower than this level, one of the divisions would refuse to participate)?

b) What is the highest price that ensures both divisions will voluntarily participate in the transfer (ie, if the price was higher than this level, one of the divisions would refuse to participate)?

c) The manager of Johnny C decides to impose a transfer price since the two divisions cannot agree. He chooses the highest feasible price. His reasoning is that selling for a high price is better for Johnny C's profit. Is the manager's reasoning sound? Explain why or why not. (Limit of 25 words.)