PERFORMANCE EVALUATION Computer Chip Company assembles personal computers and se
ID: 1162307 • Letter: P
Question
PERFORMANCE EVALUATION Computer Chip Company assembles personal computers and sells them in the retail marketplace. The company is organized into two profit centers: the assembly division and the distribution division. The demand curve facing the company (and the distribution division) is P=2,400 – 10Q. The marginal cost for assembly (which includes purchasing the parts) is constant at $550. The distribution division faces constant marginal distribution costs of $50 per unit.
A. What is the profit-maximizing retail price and output for the firm as a whole?
B. If the assembly division has monopoly power to set the transfer price, what transfer price will it select (assuming it knows all the information above)? Calculate the profits for the two-divisions in this case.
Explanation / Answer
Answer
A)
A firms maximize its profit when MR =MC
here MC = 550 + 50 = $600
MR = (d/dQ)(Q)(2400 - 10Q) = 2400 - 20Q
Hence we have
2400 - 20Q = 600
=> Q = 1800/20 = 90
and P = 2400 - 10*90 = $1500
B)
Market price is 1500 and Assemly cost is 550
hence optimum transfer price should be 550 + (1500 - 550)/2 = 550 + 950/2 = 550 + 475 = $1025
Profit for each division will be 475*90 = 42750
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