The Sather Corporation manufactures and sells 10,000 boom boxes. It buys the cassette deck for the boom box from Cassette deck division. The Cassette deck division is operating at capacity and producing 12,000 cassette decks. The demand for cassette decks is strong. Any cassete decks not sold to the Assembly department can be sold to the outside market for $35 per unit. The cassette deck division currently sells 10,000 cassette decks to the assembly division and 2000 cassette decks to the outside market. The incremental cost of manufacturing the cassette deck is $25 per unit.

A crucial component for producing high-quality cassette decks is the cassette head mechanism. The cassette deck division manufactures the head mechanism for its cassette decks. Many outside suppliers have offered to supply the cassette deck to Sather. To ensure quality Sather requires that any outside supplier wanting to supply cassette decks to Sather must purchase the head mechanism from the Cassette deck division. The cassette deck division's incremental cost of manufacturing the head mechanism is $12 per unit. The cassette deck division will charge $18 per unit for the head mechanism. The cassette deck division has excess manufacturing capacity for manufacturing the head mechanism. That is, even if the casette deck division manufactures the head mechanism for an outside supplier it will still be able to manufacture and sell 12000 cassette decks for sale in the outside market at $35 per unit.

Johnson Corporation, an ouside supplier is currently negotiating to supply 10000 cassette decks to the Assembly division for a price in the range of $37 to $43. If Johnson gets the business it will buy the head mechanism from the Cassette Deck Division for $18 per unit.

Required:

1. a) From the purely financial standpoint of Sather Corporation as a whole, should the Assembly Division accept Johnsons Corporation's offer at a price of $37 per cassette deck?

b) a price of $43 per cassette deck? Show all calculations

2. What transfer price for cassette decks will result in the cassette deck division and the assembly division taking actions that are optimal for Sather corporation as a whole? Explain your answer.