Question

Aulman Inc. has a number of divisions, including a Furniture Division and a Motel Division. The Motel Division owns and operates a line of budget motels located along major highways. Each year, the Motel Division purchases furniture for the motel rooms. Currently, it purchases a basic dresser from an outside supplier for $40. The manager of the Furniture Division has approached the manager of the Motel Division about selling dressers to the Motel Division. The full product cost of a dresser is $29. The Furniture Division can sell all of the dressers it makes to outside companies for $40. The Motel Division needs 10,000 dressers per year; the Furniture Division can make up to 50,000 dressers per year. Also, assume that the company policy is that all transfer prices are negotiated by the divisions involved.

Required:

1. What is the maximum transfer price?

2. What is the minimum transfer price?

3. Conceptual Connection: If the transfer takes place, what will be the transfer price?

Answer 1

1)The maximum transfer price set by the Motel Division, is $40. It would not pay any more than $40 because that is the price it currently pays to outside suppliers.	$       40.00
2) The minimum transfer price set by the Furniture Division, is $40 , division is operating at capacity and can sell all that it makes to outside buyers for $40.	$       40.00
3) If the transfer takes place, the transfer price will be $40. It does not matter whether or not the transfer takes place, since the transfer price would be equal to the outside market price	$40