Answers
Part (1)
Maximum transfer price which Motel division would like to pay will be the current purchase price from outside market i.e. $50
Part (2)
Calculation of Minimum Transfer price to be charged by Furniture Division-
Cost to be incurred due to transfer = $12
So, Minimum transfer price would be $12
Note- No contribution will be lost by the Furniture Division,as there is spare capacity to produce 10,000 dressers, because there is demand of 40,000 dressers from outside market next year.
Part (3)
Calculation of Profit if transfer is not made-
Furniture Division
Sales = (40,000 dressers* $50 per dresser) = $2,000,000
Less- Variable Costs= (40,000* $12) = $480,000
Contribution = $1,520,000
Less- Fixed Costs = (29-12)*50,000 = $850,000
Profit = $670,000
Motel Division
Purchase Cost from Outside Market = (10,000 Dressers*$50) = $500,000
Company as a whole
Profit of Furniture Division- Cost of Motel Division
= $670,000-$500,000
= $170,000
Calculation of profit if transfer is made at $34 -
Furniture Division
Sales in outside market = (40,000*$50) = $2,000,000
Add- Transfer to Motel Division = (10,000*$34) = $340,000
Total Receipts = $2,340,000
Less- Variable Costs = (50,000*$12) =$600,000
Contribution = $1,740,000
Less - Fixed Costs = $850,000
Profit = $890,000
Motel Division
Transfer Cost = (10,000*$34) = $340,000
Company as a whole
Profit of Furniture Division- Cost of Motel Division
= $890,000-$340,000
= $550,000
So, from the above analysis-
Benefit to Furniture Division = $890,000-$670,000
= $220,000
Benefit to Motel Division = $500,000-$340,000
= $160,000
Benefit to Company as a whole = $550,000-$170,000
= $380,000