Reno Company Is a Decentralized Company That Has Two Divisions

question 87

Essay

Reno Company is a decentralized company that has two divisions, Division A and Division
B. Division A currently is selling 16,000 units of the product to customers outside the company, incurring the following costs: variable costs of $7 per unit and total fixed costs of $48,000. The selling price to these customers is $16 per unit.Division B needs 4,000 units of the product that Division A makes. It currently is purchasing the units from an outside supplier at a price of $15 each. Division B offers to purchase the units from Division A at a price of $12; the managers of Division A say the price must be at least $14. The managers of the two divisions appear to have reached a stalemate, which threatens to prevent the transfer from occurring within the company.
Required:
1) Is it in the best interest of Reno Company for Division B to purchase the units from Division A? Show quantitative support for your answer.2) If the transfer is in the best interest of the company as a whole, should the top managers of Reno Company order the division managers to come to terms? How might the top management of Reno handle the situation other than by ordering the division managers to make the transfer?

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Definitions:

Price Discrimination

A pricing strategy where a seller charges different prices for the same product or service to different customers, based on factors like demand, cost of service, or market competition.

Single-Price Monopoly

A market condition where a monopolist sets one price for all consumers of its product, without price discrimination.

Price Elasticity

Measurement of consumer demand variations for a good due to alterations in its price, signifying the degree of consumer sensitivity to these changes.

Discount Coupons

Discount coupons are vouchers that offer a reduction in price for specific items or services, encouraging consumers to make purchases.