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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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...

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