Cornerstones of Managerial Accounting 6th Edition by Maryanne Mowen,Don Hansen ,Dan Heitger

Exercise 3

Transfer Pricing
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.
Refer to the information for Aulman Inc. above. Also, although the Furniture Division has been operating at capacity (50,000 dressers per year), it expects to produce and sell only 40,000 dressers for $40 each next year. The Furniture Division incurs variable costs of $14 per dresser. 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?
2. What is the minimum transfer price? Which division sets it?
3. Suppose that the two divisions agree on a transfer price of $35. What is the benefit for the Furniture Division? For the Motel Division? For Aulman Inc. as a whole?