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.

While the Furniture Division has been operating at capacity (50,000 dressers per year) and selling them for $40 each, it expects to produce and sell only 40,000 dressers for $40 each next year. The Furniture Division incurs variable costs of $16 per dresser.

The Motel Division needs 10,000 dressers per year; the Furniture Division can make up to 50,000 dressers per year. 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. Suppose that the two divisions agree on a transfer price of $37. What is the benefit for the Furniture Division? For the Motel Division? For Aulman Inc. as a whole?

Benefit to Furniture Division	$
Benefit to Motel Division	$
Benefit to company	$

Answer 1

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