Reference no: EM132586975

Zaaro Furnishing has two divisions set up as individual profit centres - Domestic and Business. Business division manufactures and sells computer tables for business customers. Its annual capacity is 15,000 tables, but the division currently has annual demand of only 10,000 tables.

• Business division's computer tables sell for $800 each, and the division incurs $600 of marginal cost making one table. Fixed costs of the division total to $1,500,000.
• The Domestic division makes and sells furniture items for retail consumers. The manager of Domestic sees an opportunity to modify Business's computer tables and resell them to retail consumers as IT desks for home use.
• The manager of Domestic estimates the extra cost of modifying computer tables from Business to be $200 per table. In addition, the manager projects that he could sell 5,000 of these IT desks annually at $880 each. However, he has also decided that he would not pay the Business division more than $560 for each computer table.

Question:

Question 1: Explain if a dual transfer pricing arrangement between the two divisions could be beneficial to Zaaro Furnishing.