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Baldenius Corp. produces and sells high-quality scissors made of stainless steel. The firm consists of two divisions, UP and DOWN. The UP division manufactures 30,000 pairs of scissors per year. It incurs variable manufacturing costs of $ 9 per unit and total annual fixed manufacturing costs of $ 60,000. The UP division sells 10,000 units externally at a price of $ 16 each, mostly to office supplies stores. It transfers the remaining 20,000 units internally to the DOWN division, which modifies the units, adds a titanium plasma coating, and sells them for use by salon professionals in the United States.

Baldenius Corp. has adopted a market-based transfer pricing policy. For each pair of scissors it receives from the UP division, the DOWN division pays the weighted-average external price the UP division charges its customers outside the company. The current transfer price is accordingly set at $ 16. Kathleen Bono, the manager of the UP division, receives an offer from Jean-Georges, an international hair salon supplier. Jean-Georges offers to buy 4,000 pairs of scissors at a price of $ 12.50 each, knowing that the entire scissors industry (including Baldenius Corp.) has excess capacity at this time. The variable manufacturing cost to UP for the units Jean-Georges is requesting is $ 9, and there are no additional costs associated with this offer. Accepting Jean-Georges’ offer would not affect the current price of $ 16 charged to existing external customers.

Required

1. Calculate the UP division’s current annual level of profit (without the new order).

2. Compute the change in the UP division’s profit if it accepts Jean-Georges’ offer. Will Kathleen Bono accept this offer if her aim is to maximize the UP division’s profit?

3. Would the top management of Baldenius Corp. want the UP division to accept the offer? Compute the change in firmwide profit associated with Jean-Georges’ offer.

4. Baldenius Corp. is considering changing its policy. Henceforth, the transfer price will be set at a fixed percentage discount from the weighted-average price charged by UP on external sales. At what percentage discount would the goal incongruence identified in your answer to requirements 2 and 3 no longer be a problem?

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