Dayton Company makes household water filtration equipment. The Murray Division manufactures filters. The Franklin Water Division sells to consumers. The Murray Division has the capacity to produce 8,000 filters per month at the following cost per unit:
Variable costs.......................................................................... $ 6
Division fixed costs..................................................................... 5
Allocated corporate-level facility-sustaining costs..................................4
Total cost per filter................................................................... $15
Franklin Water currently uses 6,000 Murray filters per month. Alice Morse, Franklin Water's manager, is not happy with the $15 transfer price charged by Murray. She points out that Franklin Water could purchase the same filters from outside vendors for a market price of only $12. Christina Flynn, Murray's manager, refuses to sell the filters to Franklin Water below cost. Ms. Morse counters that she would be happy to purchase the filters elsewhere. Because Murray's does not have other customers for its filters, Ms. Flynn appeals to Keith Polk, the president of Dayton, for arbitration.
Required
a. Should the president of Dayton allow Ms. Morse to purchase filters from outside vendors for $12 per unit? Explain.
b. Write a brief paragraph describing what Mr. Polk should do to resolve the conflict between the two division managers.