Question: 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 $40. 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. The Furniture Division can sell all of the dressers it makes to outside companies for $40. The Motel Division needs 10,000 dressers per year; the Furniture Division can make up to 50,000 dressers per year.
Transfer Pricing Refer to the information for Aulman Inc. above. Also, assume that 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. Conceptual Connection: If the transfer takes place, what will be the transfer price? Does it matter whether or not the transfer takes place?