Davis Company has two divisions, manufacturing and marketing. The manufacturing division manufactures units and transfers to the marketing division. Both these divisions are profit centers. The manufacturing division has a fixed cost per month $400,000 and variable cost per unit $1,000. The marketing division has a fixed cost per month $200,000 and variable cost per unit $400 excluding the transfer price from manufacturing division. The marketing division sells the units externally and the price-quantity relationship is P = $10,000 - 20Q as shown in the following table: Number of Units: 50 Selling Price $9,000. Number of Units: 75 Selling Price $8,500. Number of Units: 100 Selling Price $8,000. Number of Units: 125 Selling Price $7,500. Number of Units: 150 Selling Price $7,000. Number of Units: 175 Selling Price $6,500.Number of Units: 200 Selling Price $6,000. Number of Units: 225 Selling Price $5,500.
(a) Let the transfer price be set at $5,000 per unit. Determine the number of units to be purchased and sold externally to maximize the profit of marketing division.
(b) Base on the answer of part (a), determine the profit of manufacturing division assuming all produced units are transferred to a marketing division.
(c) Determine the profit of Davis Company base on the answer of part (a) and (b)