What price will it set and how much money will it make

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Reference no: EM13203556

Suppose that a paper mill "feeds" a downstream box mill. For the downstream mill, the marginal profitability of producing boxes declines with volume. The 1st unit of boxes increases earnings by $10, the 2nd by $9, the third $7, and so on, until the the 10th unit increases profit by just $1. the cost the upstream mill incurs for producing enough paper to make one unit of boxes is $3.50.
a. If the 2 companies are separate profit centers, and the upstream paper mill sets a single transfer price(the price the box company pays the paper mill), what price will it set and how much money will it make?
b. If paper mill were forced to transfer at marginal cost, how much money would the company make?

Reference no: EM13203556

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