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 $16 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 $34. 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
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 $16 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 $34. 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
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text: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 $16 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 $34. What is the benefit for the Furniture Division? For the Motel Division? For Aulman Inc. as a whole?
Benefit to Furniture Division
%24
Benefit to Motel Division
Benefit to company
$1
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