PROBLEM 3. Transfer Pricing 2

Bedtime Bedding Company manufactures bedcover sets for beds. The Cover Division makes blankets and the Assembly Division makes pillows (the finished products). Blankets can be sold separately for $5/unit. Pillows are sold for $6/unit. Manufacturing-related information is as follows:

Required: Calculate operating income for each division and for the company as a whole. Use market-value as the transfer price. Do all managers in the company agree with this concept? Explain!

Cover Division manufacturing costs Cover Division - Sales of blanket (externally) Cover Division - Sales of blankets to Assembly Division Assembly Division - Sales of pillows Additional manufacturing costs of Assembly Division $6,000,000 $4,000,000 $6,000,000 $7,200,000 $1,500,000