1. PT. ABC 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 Division. 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

2. Greenhouse, Inc., is a nursery products firm. It has three divisions that grow and sell plants:
the Western Division, the Southern Division, and the Canadian Division. Recently, the
Southern Division of Greenhouse acquired a plastics factory that manufactures green plastic
pots. These pots can be sold both externally and internally. Company policy permits each
manager to decide whether to buy or sell internally. Each divisional manager is evaluated on
the basis of return on investment and EVA. The Western Division had bought its plastic pots
in lots of 100 from a variety of vendors. The average price paid was $75 per box of 100 pots.
However, the acquisition made Rosario Sanchez-Ruiz, manager of the Western Division,
wonder whether a more favourable price could be arranged. She decided to approach Lorne
Matthews, manager of the Southern Division, to see if he wanted to offer a better price for
an internal transfer. She suggested a transfer of 3,500 boxes at $70 per box. Lorne gathered
the following information regarding the cost of a box of 100 pots:
Direct materials $35
Direct labor 8
Variable overhead 10
Fixed overhead* 10
Total unit cost $63
Selling price $75
Production capacity 20,000 boxes
*Fixed overhead is based on $200,000/20,000 boxes.

Required

1. Suppose that the plastics factory is producing at capacity and can sell all that it produces to
outside customers. How should Lorne respond to Rosario’s request for a lower transfer price?

2. Now assume that the plastics factory is currently selling 16,000 boxes. What are the minimum and
maximum transfer prices? Should Lorne consider the transfer at $70 per box?

3. Suppose that Greenhouse’s policy is that all transfer prices be set at full cost plus 20 percent.
Would the transfer take place? Why or why not?