The Slate Company manufactures and sells television sets. Its assembly
division (AD) buys television screens from the screen division (SD) and
assembles the TV sets. The SD, which is operating at capacity, incurs an
incremental manufacturing cost of 65 dollar per screen. The SD can sell all
its output to the outside market at a price of 100 dollar per screen, after
incurring a variable marketing and distribution cost of 8 dollar per screen.
If the \(A D\) purchases screens from outside suppliers at a price of 100 dollar
per screen, it will incur a variable purchasing cost of 7 dollar per screen.
Slate's division managers can act autonomously to maximize their own
division's operating income.
1\. What is the minimum transfer price at which the SD manager would be
willing to sell screens to the AD?
2\. What is the maximum transfer price at which the AD manager would be
willing to purchase screens from the SD?
3\. Now suppose that the SD can sell only \(70 \%\) of its output capacity of
20,000 screens per month on the open market. Capacity cannot be reduced in the
short run. The AD can assemble and sell more than \(20,000 \mathrm{TV}\) sets
per month.
a. What is the minimum transfer price at which the SD manager would be willing
to sell screens to the AD?
b. From the point of view of Slate's management, how much of the SD output
should be transferred to the AD?
c. If Slate mandates the SD and AD managers to "split the difference" on the
minimum and maximum transfer prices they would be willing to negotiate over,
what would be the resulting transfer price? Does this price achieve the
outcome desired in requirement \(3 b ?\)
Explanations 
Textbooks 
Exams 
Magazine 
