Simmons Bedding Company manufactures an array of bedding-related products,including pillows.The Cover Division of Simmons makes covers,while the Assembly Division of the company produces finished pillows.The covers can be sold separately for $10.00 a piece,while the pillows sell for $12.00 per unit.For performance-evaluation purposes,these two divisions are treated as investment centers.Financial results from the most recent accounting period are as follows:

Question

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Required:
1.What is the operating income for each of the two divisions and for the company as a whole? (Use market value as the transfer price. )
2.Do you think each of the two divisional managers is happy with this transfer-pricing method? Explain.
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 Feedback: 1. 11ea6e70_bd73_63fd_8f54_c7fb26040670_TB1699_00 2.As reflected above,the manager of the Assembly Division is probably not happy with the transfer-pricing method chosen.This is because the use of market prices results in his/her division showing an operating loss for the period.This manager would probably argue that the transfer price should be set at something less than market price,a situation that may be tenable if there are cost savings (transportation,sales commissions,etc. )associated with internal transfers.In general,the use of market price as the transfer price is desirable in terms of the objectives presented at the beginning of Part Two of Chapter 19.In this case,the use of market prices signals the need for the Assembly Division manager to either increase the selling price of its product or to reduce its own costs,or both.

Simmons Bedding Company Manufactures an Array of Bedding-Related Products,including Pillows