A company permits its decentralized units to “lease” space to one another. Uptown Division has leased some of its idle warehouse space to Downtown Division for $60 per square foot per month.
Recently, Uptown obtained a new five-year contract, which will increase its production sufficiently so that the warehouse space is more valuable to it. Uptown has notified Downtown that the rental price will increase to $210 per square foot per month. Downtown can lease space at $120 per square foot in another warehouse from an outside company but prefers to stay in the shared facilities.
Downtown’s manager states that she would prefer not to move. If Downtown Division continues to use the space, Uptown will have to rent other space for $180 per square foot per month. (The difference in rental prices occurs because Uptown Division requires a more substantial warehouse building than Downtown Division does.)
Required
Recommend a transfer price and explain your reasons for choosing that price.