Now assume that the firm is divided into two profit centers: the assembly division and the distribution division. The assembly division assembles the product at a total cost of 500 x Q and then transfers it to the distribution division that faces the firm's demand curve. The distribution division has no costs other than the transfer price and the distribution costs for the product. Assume that the assembly division has the power to set the transfer price and that the distribution division can only buy internally. The distribution division, however, can select the quantity to purchase.
a. Given the information provided under question 9, please identify/describe the assembly division's problem.
b. Solve the assembly division's problem: what transfer price will the assembly division charge?
c. What are the resulting retail price, quantity, and profits for the two divisions?