Question

Bach Company makes household water filtration equipment. The Vinson Division manufactures filters. The Vine Water Division then uses the filters as a component of the final product Bach sells to consumers. The Vinson Division has the capacity to produce 8,000 filters per month at the following cost per unit:
Variable costs ................. $12
Division fixed costs ................ 10
Allocated corporate-level facility-sustaining costs .... 8
Total cost per filter ................ $30
Vine Water currently uses 6,000 Vinson filters per month. Kasey Deng, Vine Water’s manager, is not happy with the $30 transfer price charged by Vinson. He points out that Vine Water could purchase the same filters from outside vendors for a market price of only $24. Faith Patel, Vinson’s manager, refuses to sell the filters to Vine Water below cost. Mr. Deng counters that he would be happy to purchase the filters elsewhere. Because Vinson’s does not have other customers for its filters, Ms. Patel appeals to Daniel Salter, the president of Bach, for arbitration.

Required
a. Should the president of Bach allow Mr. Deng to purchase filters from outside vendors for $24 per unit? Explain.
b. Write a brief paragraph describing what Mr. Salter should do to resolve the conflict between the two division managers.



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  • CreatedFebruary 07, 2014
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