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:
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.
Definitions:
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