Sony manufactures and sells television sets. Its assembly division ( AD ) buys television screens from the
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Question:
Sony manufactures and sells television sets. Its assembly division AD buys television screens from the screen division SD and assembles the TV sets. The SD which is operating at capacity, incurs an incremental manufacturing cost of $ per screen. The SD can sell all its output to the outside market at a price of $ per screen, after incurring a variable marketing and distribution cost of $ per screen. If the AD purchases screens from outside suppliers at a price of $ per screen, it will incur a variable purchasing cost of $ per screen. Sonys division managers can act autonomously to maximize their own divisions operating income.
Required:
What is the minimum transfer price at which the SD manager would be willing to sell screens to the AD
What is the maximum transfer price at which the AD manager would be willing to purchase screens from the SD
Now suppose that the SD can sell only of its output capacity of screens per month on the open market. Capacity cannot be reduced in the short run. The AD can assemble and sell more than TV sets per month.
What is the minimum transfer price at which the SD manager would be willing to sell screens to the AD
From the point of view of Sonys management, how much of the SD output should be transferred to the AD
If Sony mandates the SD and AD managers to split the difference on the minimum and maximum transfer prices they would be willing to negotiate over, what would be the resulting transfer price? Does this price achieve the outcome desired in requirement b
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