Murray$$s So$-$Soft$-$Sheets were becoming incredibly popular. Murray

Company initially planned to produce and sell the sheets, but then decided to add

another layer of production: using the very soft sheets to create quilts. The unique

feel of these sheets comes from a special production process that other

manufacturers have found di$$icult to replicate. As such, Murray$$s had a solid

market hold on both sheets and quilts.

Lee managed the sheet division and had maximized production output. He sold

sheets to both external customers and the quilt division, with his costs and external

selling price shown below.

Maya managed the quilt division and had been purchasing the sheets from Lee for

an agreed$-$on price of $10\%$ above absorption cost$.$ She needed two sheets per quilt,

plus some cotton batting and stitching. Maya$$s cost info is also shown below.

Sheet Division Quilt Division

Variable cost per unit $$8$ $$6$

Absorption cost per unit $$10$ $$10$

Market price per unit $$20$ $$80$

Quantity produced $5,0001,000$

Quantity sold externally $3,0001,000$

Quantity sold internally $2,000$ N$/$A

Required

a$)$ At the quantities and selling prices shown, how much gross margin is Lee earning on

total sheet sales? How much gross margin is Maya recognizing for all of her quilt

sales? How much total gross margin do these two divisions generate $($before the

intracompany transactions are eliminated$)?$

b$)$ Lee would like to renegotiate the transfer price of the sheets, since he has the

opportunity to sell all production quantity externally next year. At what transfer price

would he be willing to continue selling the $2,000$ sheets to Maya? If they agree on

that transfer price, how much gross margin would Lee recognize? How much gross

margin would Maya recognize? How much total gross margin would these two

divisions generate $($again$,$ before intracompany transactions are eliminated$)?$