Question

Sako Company’s Audio Division produces a speaker that is used by manufacturers of various audio products. Sales and cost data on the speaker follow:

Selling price per unit on the intermediate market	$	42
Variable costs per unit	$	19
Fixed costs per unit (based on capacity)	$	9
Capacity in units		57,000

Sako Company has a Hi-Fi Division that could use this speaker in one of its products. The Hi-Fi Division will need 10,000 speakers per year. It has received a quote of $37 per speaker from another manufacturer. Sako Company evaluates division managers on the basis of divisional profits.

Required:

1. Assume the Audio Division is now selling only 47,000 speakers per year to outside customers.

a. From the standpoint of the Audio Division, what is the lowest acceptable transfer price for speakers sold to the Hi-Fi Division?

b. From the standpoint of the Hi-Fi Division, what is the highest acceptable transfer price for speakers acquired from the Audio Division?

c. What is the range of acceptable transfer prices (if any) between the two divisions? If left free to negotiate without interference, would you expect the division managers to voluntarily agree to the transfer of 10,000 speakers from the Audio Division to the Hi-Fi Division?

d. From the standpoint of the entire company, should the transfer take place?

2. Assume the Audio Division is selling all of the speakers it can produce to outside customers.

a. From the standpoint of the Audio Division, what is the lowest acceptable transfer price for speakers sold to the Hi-Fi Division?

b. From the standpoint of the Hi-Fi Division, what is the highest acceptable transfer price for speakers acquired from the Audio Division?

c. What is the range of acceptable transfer prices (if any) between the two divisions? If left free to negotiate without interference, would you expect the division managers to voluntarily agree to the transfer of 10,000 speakers from the Audio Division to the Hi-Fi Division?

d. From the standpoint of the entire company, should the transfer take place?

Answer 1

Selling price per unit on the intermediate market	42.00
Variable costs per unit	19.00	A
Fixed costs per unit (based on capacity)	9.00	B
Capacity in units	57,000.00
Total Fixed costs	513,000.00
Total costs per unit	28.00	C=A+B
1. Assume the Audio Division is now selling only 47,000 speakers per year to outside customers.
a. From the standpoint of the Audio Division, what is the lowest acceptable transfer price for speakers sold to the Hi-Fi Division?
The lowest acceptable transfer price for speakers sold to the Hi-Fi Division would be its variable cost i.e. $ 19. Fixed cost is a sunk and should not be considered.
b. From the standpoint of the Hi-Fi Division, what is the highest acceptable transfer price for speakers acquired from the Audio Division?
The highest acceptable transfer price for speakers would be $ 37. Because this is the quote Hi-Fi Davison received from the external supplier. So they cannot accept more than $ 37 as the product is available at # 37 from external market.
c. What is the range of acceptable transfer prices (if any) between the two divisions? If left free to negotiate without interference, would you expect the division managers to voluntarily agree to the transfer of 10,000 speakers
from the Audio Division to the Hi-Fi Division?
The range should be between $ 19 to $ 37 i.e. lowest to highest.
d. From the standpoint of the entire company, should the transfer take place?
Total cost of (including fixed costs) making speakers is $ 28. External price is $ 37. So, if Audio Division has spare capacity of 10,000 then transfer should be done because it will save $ 9 (37-28) on 10,000 units.
Total savings will be= (10000*9)= $ 90,000. So the transfer should take place
2. Assume the Audio Division is selling all of the speakers it can produce to outside customers.
a. From the standpoint of the Audio Division, what is the lowest acceptable transfer price for speakers sold to the Hi-Fi Division?
The lowest acceptable transfer price for speakers sold to the Hi-Fi Division would be its sell price i.e. $ 42 because Audio Division had a steady market so they should not sell at loss.
b. From the standpoint of the Hi-Fi Division, what is the highest acceptable transfer price for speakers acquired from the Audio Division?
The highest acceptable transfer price for speakers would be $ 37. Because this is the quote Hi-Fi Davison received from the external supplier. So they cannot accept more than $ 37 as the product is available at # 37 from external market.
c. What is the range of acceptable transfer prices (if any) between the two divisions? If left free to negotiate without interference, would you expect the division managers to voluntarily agree to the transfer of 10,000 speakers
from the Audio Division to the Hi-Fi Division?
Transfer is impossible because the product already have a steady market and Audio Division is selling its entire units at $ 42. Hi-fi division can buy the same product at $ 37. So its best to buy from outside.
d. From the standpoint of the entire company, should the transfer take place?
The transfer should not take place. Company will loose money if they transfer.