Solved: Zee Spin manufactures a line of golf club wedges

sand

Zee Spin manufactures a line of golf club wedges (sand wedge, pitching wedge, lob wedge, and
attack wedge) that vary with loft and club head sole design. The wedges have become very
popular among professional and serious golfers because of their unique club head design and
shafts. All Zee Spin wedges consist of three parts: club head, shaft, and grip. Zee Spin
manufactures the club heads and shafts and purchases the grips. The three components are
assembled to produce a wedge that is sold to distributors, who then sell them to golf pro shops
and websites. The shafts are specially designed to match the playing characteristics of the Zee
Spin wedge club head.

The following table summarizes the total costs of producing a complete Zee Spin wedge. All the
various models of Zee Spin wedges (sand wedge, pitching wedge, lob wedge, and attack
wedge) have the same cost structure.

Zee Spin traditionally only sold complete wedges (club head, shaft, and grip), and the company
was treated as a single profit center. But with the success of the Zee Spin brand and recent
inquiries from other club makers about purchasing just Zee Spin shafts, which are unique in the
industry, Zee Spin is going to sell both complete wedges (as they do now) and individual shafts.
To implement this strategy, Zee Spin will create two profit centers: Wedges and Shafts. The
Shaft profit center will produce shafts for external customers, as well as for the Zee Spin Wedge
profit center. There will be two profit center managers in Zee Spin that will be rewarded based
on the profits of their respective profit centers. The Zee Spin wedges will continue to be sold for
$75 per complete wedge, while the shafts will be sold for $23 per shaft.

Shafts that are sold externally will incur variable selling costs of $2.43 (primarily sales
commission and shipping). These costs are not incurred for shafts sold internally to the Wedge
profit center.

Required:

a. The owners of Zee Spin want to maximize profits and realize that, to properly motivate the
managers of the Wedges and Shafts profit centers, they need to set the proper transfer price for
the shafts produced by the Shafts profit center and sold to the Wedges profit center. Using the
actual data provided in the problem, what transfer price should be used for the shafts produced
by the Shafts profit center and sold to the Wedges profit center? (Your answer should be a
specific number, such as $18.00.)

b. After implementing the transfer price policy you described in part (a), what problems should
the owners of Zee Spin anticipate? Stated differently, what non-firm-value maximizing behaviors
by the two profit center managers should the owners of Zee Spin expect to occur?

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 Zee Spin manufactures a line of golf club wedges sand

ANSWER
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