QUESTION 3

Nile and Amazon are divisions of River plc. Nile produces an intermediate product that is transferred to Amazon at a transfer price of 20 that is based on full cost plus a mark-up.

Demand for the final product is 1,000 units at 80 with demand rising by 1,000 units for every 10 reduction in price. The maximum output of Nile is 6,000 units and there is no other supplier of the intermediate product.

Variable costs for Nile are 9 per unit and 5 per unit for Amazon. Fixed costs are 40,000 per annum for Nile and 60,000 for Amazon.

Calculate the number of units that gives Nile, Amazon and River plc the greatest profit respectively and discuss your computation