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	$	128
Variable costs per unit	$	110
Fixed costs per unit (based on capacity)	$	8
Capacity in units		25,000

Sako Company has a Hi-Fi Division that could use this speaker in one of its products. The Hi-Fi Division will need 5,000 speakers per year. It has received a quote of $125 per speaker from another manufacturer. Sako Company evaluates division managers on the basis of divisional profits.

Required:

1. Assume the Audio Division sells only 20,000 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 5,000 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 22,500 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 5,000 speakers from the Audio Division to the Hi-Fi Division?

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

3. Assume the Audio Division is selling 25,000 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 5,000 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. Assume the Audio Division sells only 20,000 speakers per year to outside customers.

a. If Audio Division is currently selling only 20,000 speaker each year to outside customers at the stated $128 price, it means division is having spare capacity of 5000 speaker.

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

= $110

b. Highest acceptable transfer price from the perspective of the Hi-fi Division = marker price from outside supplier

= $125 per speaker

c. Range of acceptable transfer prices (if any) between the two divisions = $110 to $125

Yes, the managers of the Audio and Hi-fi Divisions likely to voluntarily agree to a transfer price for 5,000 speakers.

d. Yes, from stand point of company also, this transfer should take place.

1. Assume the Audio Division sells only 22,500 speakers per year to outside customers.

a. If Audio Division is currently selling only 22,500 speaker each year to outside customers at the stated $128 price, it means division is having spare capacity of 2500 speaker.

The Hi-Fi Division will need 5,000 speakers per year.

For 2500 speaker

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

= $110

For another 2500 speaker

lowest acceptable transfer price from the perspective of the audio Division is selling price i.e. $128 per speaker

b. Highest acceptable transfer price from the perspective of the Hi-fi Division = marker price from outside supplier

= $125 per speaker

c. Range of acceptable transfer prices (if any) between the two divisions = $110 to $128

Yes, the managers of the Audio and Hi-fi Divisions likely to voluntarily agree to a transfer price for 5000 speakers.

d. Yes, from stand point of company also, this transfer should take place.

3: Assume the Audio Division is selling 25,000 speakers per year to outside customers.

a. If Audio Division can sell all of its speaker to outside customers for $128 per speaker,

lowest acceptable transfer price from the perspective of the audio Division is selling price i.e. $128 per speaker

b. Highest acceptable transfer price from the perspective of the Hi-fi Division = marker price from outside supplier

= $125 per speaker

c. 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 Hifi division.

Manager of Audiot and Hi -fi division is not likely to voluntarily agree to a transfer price for 5,000 speakers.

d. From stand point of the entire company also, this transfer should not take place.