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Transfer prices and divisional profits

A chair manufacturer has two divisions: framing and upholstering. The framing costs are $100 per chair and the upholstering costs are $200 per chair. The company makes 5,000 chairs each year, which are sold for $500. Un-upholstered chair frames can be sold at cost to other chair manufacturers.

a) What is the minimum transfer price for this company?
b) What is the profit of each division if the transfer price is $150?
c) What is the profit of each division if the transfer price is $200?

Please provide workings to the solutions.

Solution Preview

a) What is the minimum transfer price for this company?
Minimum transfer price should be the price at which an un-upholstered chair frame can be sold to other manufacturers, i.e. $100 per unit.

b). What is the profit of each division if the transfer price is $150?
If the transfer price is $150, then

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Solution Summary

Solution determines the minimum transfer price. It also describes the steps to estimate the profits of associated divisions for the given transfer prices.

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