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 $50. 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 $50 each, it expects to produce and sell only 40,000 dressers for $50 each next year. The Furniture Division incurs variable costs of $15 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?
$

Which division sets it?
Motel Division

2. What is the minimum transfer price?
$

Which division sets it?
Furniture Division

3. Suppose that the two divisions agree on a transfer price of $31. 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

Req 1.

Maximum Transfer Price which the Motel Division is ready to pay is the pirce which it is paying to the outside supplier.

Therefore, the maximum transfer price is $ 50.

Req 2:

As the furniture division is having a excess capacity of 10000 units for Motel division,, it will set the minimum price equal to variable cocst of producing the units.

As there is no loss of contribution of regular sale, the Furniture division is satisfied with the recovery of variable c ost from the prirce.

Therefore, the minimum price set by the Furniture division is $ 15.

Req 3:

When the price is set at $31.

Then the following benefit appears:

Benefit to Furniture division (10000 units @16)

16000

Benefit to Mtel division (10000 units @19)

19000

Benefit of company (10000 units @35)

35000