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	$	41
Variable costs per unit	$	19
Fixed costs per unit (based on capacity)	$	8
Capacity in units		54,000

Sako Company has a Hi-Fi Division that could use this speaker in one of its products. The Hi-Fi Division will need 9,000 speakers per year. It has received a quote of $34 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 45,000 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 9,000 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 9,000 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

Solution 1:

If Audio Division is currently selling only 45,000 speakers each year to outside customers at the stated $41 price, it means division is having spare capacity of 9000 speakers.

Lowest acceptable transfer price from the perspective of the Audio Division = Variable cost per speaker

= $19

Highest acceptable transfer price from the perspective of the Hi-Fi Division = quoted price of other manufacturer = $34 per speaker

Range of acceptable transfer prices (if any) between the two divisions = $19 to 34

Yes, the managers of the Audio and Hi-Fi Divisions likely to voluntarily agree to a transfer price for 9000 speakers.

Yes, from stand point of view of company this transfer should take place as it will result in huge cost savings of Hi-fi division.

Solution 1:

If Audio Division can sell all of its speaker to outside customers for $41 per speaker, lowest acceptable transfer price from the perspective of the Audio Division is selling price i.e. $41 per speaker.

Highest acceptable transfer price from the perspective of the Hi-Fi Division = quoted price of other manufacturer = $34 per speaker

Range of acceptable transfer prices (if any) between the two divisions - Range of acceptable transfer price cannot be established as lowest acceptable transfer price for Audio division is higher than highest acceptable transfer price of Hi-fi division.

Manager of Audit and Hi-Fi division is not likely to voluntarily agree to a transfer price for 9,000 speakers for next year.

No, from standpoint of view of company, this transfer should not take place as Hi-FI division can buy speakers at lower cost in outside market and Audit division can sale all of its output at a price higher than price quoted by other manufacturer to Hi-Fi division.