(Appendix 12A)Krenski Corporation Has a Parts Division That Does Work

question 6

Essay

(Appendix 12A)Krenski Corporation has a Parts Division that does work for other Divisions in the company as well as for outside customers.The company's Equipment Division has asked the Parts Division to provide it with 10, 000 special parts each year.The special parts would require $12.00 per unit in variable production costs.
The Equipment Division has a bid from an outside supplier for the special parts at $31.00 per unit.In order to have time and space to produce the special part, the Parts Division would have to cut back production of another part-the TW3 that it presently is producing.The TW3 sells for $35.00 per unit, and requires $13.00 per unit in variable production costs.Packaging and shipping costs of the TW3 are $3.00 per unit.Packaging and shipping costs for the new special part would be only $2.00 per unit.The Parts Division is now producing and selling 50, 000 units of the TW3 each year.Production and sales of the TW3 would drop by 10% if the new special part is produced for the Equipment Division.
Required:
a.What is the range of transfer prices within which both the Divisions' profits would increase as a result of agreeing to the transfer of 10, 000 special parts per year from the Parts Division to the Equipment Division?
b.Is it in the best interests of Krenski Corporation for this transfer to take place? Explain.
(Note: Due limitations in fonts and word processing software, > and < signs must be used in this solution rather than "greater than or equal to" and "less than or equal to" signs. )

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Definitions:

Colluding Firms

Companies that agree, often covertly, to work together, typically to set prices or market conditions, in order to reduce competition.

Cost Function

A mathematical expression that calculates the total cost of producing a certain number of goods or services.

Market Demand

The aggregate quantity of a good or service that all consumers in a market are willing and able to purchase at different prices.

Stackelberg Leader

The Stackelberg leader refers to the dominant firm in a duopoly that makes its production decision first, thereby influencing the market actions of the following competitor.