All That Jazz Ltd (ATJ) has two divisions - the 'Gin' division and the 'Piano' division. Division 'Gin' manufactures a product called the aye and Division 'Piano' manufactures a product called the bee. Each bee uses a single aye as a component. 'Gin' is the only manufacturer of the aye and supplies both 'Piano' and outside customers. Details of Gin's and Piano's operations for the coming period are as follows:

Market research has indicated that demand for ATJ Ltd's products from outside customers will be as follows in the coming period:
- $\quad$ the aye: at unit price $\$ 1,000$ no ayes will be demanded but demand will increase by 25 ayes with every $\$ 1$ that the unit price is reduced below $\$ 1,000$
- the bee: at unit price $\$ 4,000$ no bees will be demanded, but demand will increase by 10 bees with every $\$ 1$ that the unit price is reduced below $\$ 4,000$.

Required:

(a) Calculate the unit selling price of the bee (accurate to the nearest \$) that will maximise ATJ Ltd's profit in the coming period.

(b) Calculate the unit selling price of the bee (accurate to the nearest \$) that is likely to emerge if the Divisional Managers of 'Gin' and 'Piano' both set selling prices calculated to maximise divisional profit from sales to outside customers and the transfer price of ayes going from Gin to Piano is set at 'market selling price'.

(c) Explain why your answers to parts

(a) and

(b) are different, and propose changes to the system of transfer pricing in order to ensure that ATJ Ltd is charging its customers at optimum prices.

Transcribed Image Text:

Fixed costs Variable costs per unit Division 'Gin' $7,500,000 $280 Capacity Units 30,000 Division 'Piano' $18,000,000 $590 (*) 18,000