Refer to the Aulman Inc. company information shown in Exercise 12-27. 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 change in operating income for the Furniture Division? For the Motel Division? For Aulman Inc. as a whole?

Data From Exercise 12-27:

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.

Required:
  1.  Which division sets the maximum transfer price? Which division sets the minimum transfer price?
  2.  Suppose the company policy is that all transfers take place at full cost. What is the transfer price?
  3.  Do you think that the transfer will occur at the company-mandated transfer price? Why or why not?