Jesper, 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 $42. Carrie Burnside, manager of the Furniture Division, has approached George Sanchez, manager of the Motel Division, about selling dressers to the Motel Divi- sion. Carrie has researched the dresser costs and determined the following costs:
|
Direct materials
|
$ 8
|
|
Direct labor
|
4
|
|
Variable overhead
|
3
|
|
Fixed overhead
|
12
|
|
Total manufacturing cost
|
$27
|
Currently, the Furniture Division has capacity to produce 75,000 dressers but is only producing 60,000. The Motel Division needs 10,000 dressers per year.
Required
1. What is the maximum transfer price? The minimum transfer price? Should the transfer occur?
2. Suppose that Carrie and George agree on a transfer price of $30. What is the benefit to each division? What is the benefit to the company as a whole?
3. Suppose that the Furniture Division were operating at capacity. What would be the maximum transfer price? The minimum transfer price? Should the transfer take place in this case? Why or why not?