Leontif Corporation Has a Parts Division That Does Work for Other

question 12

Essay

Leontif 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 2,000 special parts each year.The special parts would require $17.00 per unit in variable production costs.

The Equipment Division has a bid from an outside supplier for the special parts at $28.00 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 J789 that it presently is producing.The J789 sells for $34.00 per unit,and requires $22.00 per unit in variable production costs.Packaging and shipping costs of the J789 are $4.00 per unit.Packaging and shipping costs for the new special part would be only $0.50 per unit.The Parts Division is now producing and selling 10,000 units of the J789 each year.Production and sales of the J789 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 2,000 special parts per year from the Parts Division to the Equipment Division?
b.Is it in the best interests of Leontif 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:

Quantity Supplied

The amount of a good or service that producers are willing and able to sell at a given price over a specified period of time.

Quantity Demanded

The total amount of a good or service that consumers are willing and able to purchase at a given price level.

Demand P

The desire and ability of consumers to purchase a good or service at a particular price, often represented as a demand curve.

Consumer Surplus

The discrepancy in the total money consumers are willing to invest in a good or service compared to what they really pay.