Reference no: EM133002428

Scenario - DIY Furniture (DIY) sells a wide array of furniture at a variety of price points that are attractive to a wide audience, from students furnishing their first apartment to professionals remodelling a kitchen. The furniture is provided to the customer unassembled at a lower cost than the more expensive assembled furniture from competing furniture stores, and assembly instructions are included. To make assembly easier, all hardware is provided and the furniture can be put together with minimal tools. The hardware is often custom for this reason. There is currently some tension between the bolts division and the retail division of DIY.

The bolts division makes a variety of bolts and nuts for the furniture. It is all custom and specific to the needs of DIY. There is no external market. The retail division buys all bolts from the bolt division. There is no external provider.

The CEO of DIY is new. At her former company, an electronics retailer, all divisions were operated as profit centres and this really motivated management to increase the overall profits of the company. She believes this is the best way to ensure costs are kept low and revenues high. Upon starting at DIY, she changed the evaluation of each department to that of a profit centre. As a result, bolts increased its transfer price to add a 25% markup to cost.

1. What is the transfer pricing strategy being used?

2. How does the strategy impact management and the company as a whole?

3. What advice would you give to the company?