Evergreen Nursery and Landscape has two profit centers: Nursery and Landscape. Nursery buys young evergreen trees, grows them for a year, and then sells them to Landscape. Landscape then sells and plants them for residential customers. Nursery only sells its trees to Landscape, and Landscape only buys trees from Nursery. Landscape faces the following demand curve per month for planted trees by residential customers:
Trees sold Price per tree
2 ........... $ 260
3 ........... 240
4........... 220
5........... 200
6........... 180
7........... 160
8........... 140
9........... 120

Nursery has variable costs of $ 10 per tree and fixed costs of $ 210 per month. Landscape has variable costs of $ 50 per tree (before paying Nursery a transfer price for the tree) and fixed costs of $ 290 per month.

a. Assume the owner of Evergreen Nursery and Landscape knows all the costs of both divisions and the demand curve. If the owner sets the price for trees planted by Landscape, what final price for a planted tree would the owner set to maximize her profits and how many trees per month get planted?
b. Suppose the owner does not know the demand curve faced by Landscape, but she does know each division’s fixed and variable costs. What transfer price would the owner set to maximize her profits?
c. Suppose that Nursery sets the transfer price at $ 75 per tree. How many trees will Landscape purchase from Nursery and plant per month in order to maximize Landscape’s profits ( including the transfer price of $ 75 per tree)?
d. What is Nursery’s profit from setting a transfer price of $ 75, assuming Landscape maximizes its profits as in part (c)?
e. Compare the firm wide profits that result from the transfer price chosen in part (b) and the firm wide profits that result from a $ 75 transfer price chosen in part (c), and explain why they are either the same or different.

  • CreatedDecember 15, 2014
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