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.
Required: 1. Which division sets the maximum transfer price? Which division sets the minimum transfer price?
2. Suppose the company policy is that all transfers take place at full cost. What is the transfer price?
3. Conceptual Connection: Do you think that the transfer will occur at the company-mandated transfer price? Why or why not?