US Copiers manufactures a full line of copiers including desktop models. The Small Copier Division (SCD) manufactures desktop copiers and sells them in the United States. A typical model has a retail price of less than $500. An integral part in the copier is the toner cartridge that contains the black powder used to create the image on the paper. The toner cartridge can be used for about 10,000 pages and must then be replaced. The typical owner of an SCD copier purchases four replacement cartridges over the life of the copier.

SCD buys the initial toner cartridges provided with the copier from the Toner Division (TD) of US Copiers. TD sells subsequent replacement cartridges to distributors that sell them to U.S. retail stores. Toner cartridges sell to the end customer for $50. TD sells the cartridges to distributors for about 70% of the final retail price paid by the customer. The Toner Division manager argues that the market price to TD of $35 (70% x $50) is the price SCD should pay to TD for each toner cartridge transferred.

1. Why does US Copiers manufacture both copiers and toner cartridges? Why don't separate firms specialize in either copiers or toner cartridges like Intel specializes in making computer chips and Gateway specializes in assembling PCs?

2. You work for the president of SCD. Write a memo to your boss identifying the salient issues she should raise in discussing the price SCD should pay TD for toner cartridges included in SCD copiers.