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 $19 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? 60

Which division sets it? Motel Division

2. What is the minimum transfer price? 19

Which division sets it? Furniture Division

3. Suppose that the two divisions agree on a transfer price of $32. What is the benefit for the Furniture Division? For the Motel Division? For Aulman Inc. as a whole?

Benefit to Furniture Division	$130,000
Benefit to Motel Division	$
Benefit to company	$