Transfer Pricing

Algodones Inc. has a number of divisions, including a Mattress Division and a Furniture Division. The Furniture Division owns and operates a chain of furniture stores in the Midwest. Each year, the Furniture Division purchases mattresses for its bedroom suites. Currently, it purchases a basic mattress from an outside supplier for $$40.$ The manager of the Mattress Division has approached the manager of the Furniture Division about selling mattresses to the Furniture Division. The full product cost of a mattress is $$160.$

While the Mattress Division has been operating at capacity $(50,000$ mattresses per year$)$ and selling them for $$40$ each, it expects to produce and sell only $40,000$ mattresses for $$40$ each next year. The Mattress Division incurs variable costs of $$16$ per mattresses.

The Furniture Division needs $10,000$ mattresses per year; the Mattress Division can make up to $50,000$ mattresses per year. The company policy is that all transfer prices are negotiated by the divisions involved.

Required:

What is the maximum transfer price?

$

Which division sets it$?$

What is the minimum transfer price?

Which division sets it$?$

$3.$ Suppose that the two divisions agree on a transfer price of $$37.$ What is the benefit for the Mattress Division? For the Furniture Division? For Algodones Inc. as a whole?

Benefit to Mattress Division

Benefit to Furniture Division

Benefit to company

$$

$

$$