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 $$60.$ The manager of the Furniture Division has approached the manager of the Motel Division about selling dressers to the Motel Division. The full product cost of a dresser is $$29.$

While the Furniture Division has been operating at capacity $(50,000$ dressers per year$)$ and selling them for $$60$ each, it expects to produce and sell only $40,000$ dressers for $$60$ each next year. The Furniture Division incurs variable costs of $$13$ 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?

$fill in the blank $1$

Which division sets it$?$

Motel Division

$2.$ What is the minimum transfer price?

$fill in the blank $3$

Which division sets it$?$

Furniture Division

$3.$ Suppose that the two divisions agree on a transfer price of $$38.$ What is the benefit for the Furniture Division? For the Motel Division? For Aulman Inc. as a whole?

Benefit to Furniture Division $fill in the blank $5$

Benefit to Motel Division $fill in the blank $6$

Benefit to company $fill in the blank $7$