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	$	46
Variable costs per unit	$	16
Fixed costs per unit (based on capacity)	$	9
Capacity in units		65,000

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 $30 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 55,000 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?

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?

Answer 1

1.Audio division is now selling only 55000 units, therefore there is idle capacity of 10000 units.

(a) From the standpoint of the Audio Division the lowest acceptable transfer price for speakers sold to the Hi-Fi Division will be variable cost of production that is $16 per unit.

(b) From the standpoint of the Hi-Fi Division, the highest acceptable transfer price for speakers acquired from the Audio Division will be the quotes received from outside manufacturer that is $30 per unit.

(c) the range of acceptable transfer prices between the two divisions will be $16 to $30 per unit.

Yes, i expect the division managers to voluntarily agree to the transfer of 10,000 speakers from the Audio Division to the Hi-Fi Division because range is within the quotes available from outside manufacturer.

2.Audio division is selling all the units outside therefore there is no idle capacity.

(a) From the standpoint of the Audio Division, the lowest acceptable transfer price for speakers sold to the Hi-Fi Division would be selling price per unit in intermediate market that is $46 per unit.

(b) From the standpoint of the Hi-Fi Division, the highest acceptable transfer price for speakers acquired from the Audio Division will be the quotes received from outside manufacturer that is $30 per unit.

(c) There is no range of acceptable transfer price since maximum price which Hi-Fi division is willing to pay is only $30 on the other hand minimum transfer price acceptable to Audio division is $46 per unit.

For the reason mentioned above, i would not expect the division managers to voluntarily agree to transfer of 10000 units.