Question

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 $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. 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? $ 40 Which division sets it?
2. What is the minimum transfer price? $ 14 Which division sets it?
3. Conceptual Connection: If the transfer takes place, what will be the transfer price? $ 40 Does it matter whether or not the transfer takes place?

Answer 1

Step-by-step explanation:

Standard fixed overhead rate=budgeted fixed overhead costs/practical capacity=$400000/32000=$12.50

Fixed overhead spending variance=Actual fixed overhead-Budgeted fixed Overhead=$403400-$400000=$3400

Fixed overhead volume variance=Budgeted fixed overhead-(Standard hours*Standard fixed overhead rate)=400000-(0.80*32000)=$397440