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Suppose that a paper mill feeds a down- stream box mill. For the downstream mill, the marginal profitability of producing boxes declines with volume. For
Suppose that a paper mill "feeds" a down- stream box mill. For the downstream mill, the marginal profitability of producing boxes declines with volume. For example, the first unit of boxes increases earnings by $10, the second $9, the third $8, and so on, until the tenth unit increases profit by just $1. The cost the upstream mill incurs for producing enough paper to make one unit of boxes is $3.50.
- If the two companies are separate profit centers, and the upstream paper mill sets a single transfer price (the price the box com- pany pays the paper mill), what price will it set, and how much money will the company make?
- If the paper mill were forced to transfer at marginal cost, how much money would the company make?
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