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 $15 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? $ 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 $31. What is the benefit for the Furniture Division? For the Motel Division? For Aulman Inc. as a whole? Benefit to Furniture Division $ Benefit to Motel Division $ Benefit to company $ Check My Work3 more Check My Work uses remaining. Previous

This is the maximum price they will need to get it in the market if they are not buying in-house and it needs to be set by them because it determines the maximum profit it can make from the transaction.

2. The minimum transfer price is $29 and it's to be set by the Furniture division.

This is the production cost and it's still profitable since it has meet his fixed cost at 40,000 unit and the variable cost is $15. The Furniture set the price because it determines the maximum profit it makes from the transaction.

3. Benefit to Motley division is additional profit of $16 per unit for 10,000 units ($31-$15)

Benefit to Furniture division is a reduction in cost of $29 per units on 10000 unit ($60-31)

Benefit to company is the combination of the benefits from both Motly and Furniture division.