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 $ 40 Variable costs per unit $ 19 Fixed costs per unit (based on capacity) $ 6 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 $33 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

1..Full capacity	57000
Current operating capacity	47000
ie. Below full capacity
Table-1		Outside quote
S.P./unit	40	33
V.C./unit	19	19
Contribution /unit(40-19)	21	14
Fixed costs(47000*6)	282000

a.Lowest acceptable transfer price for speakers sold to the Hi-Fi Division

will be

The variable cost of producing each additional unit=

$19

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

is   $ 33

same as outside manufacturer's quote

c. Range of acceptable transfer prices (if any) between the two divisions

$ 19 to $ 33

If left free to negotiate without interference, will the division managers to voluntarily agree to the transfer of 10,000 speakers from the Audio Division to the Hi-Fi Division

NO

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

To the whole company:

Cont. lost+savings in outside purchase costs

ie. -7+33=

ie. 26/unit

$ 260000 savings to the company

So, the transfer SHOULD take place

2..Full capacity	57000
Current operating capacity	57000
ie.Operating at full capacity

a.Lowest acceptable transfer price for speakers sold to the Hi-Fi Division

will be

The variable cost of producing each additional unit+Opportunity cost of contribution lost due to transfer.

ie. 19+21=

40

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

is   the same   ---$ 33

same as outside manufacturer's quote

c. Range of acceptable transfer prices (if any) between the two divisions

NIL--- no meeting range.

Audio Divn. Will not sell for less than 40 &

Hi-Fi divn. Will not buy for more than 33

If left free to negotiate without interference, will the division managers voluntarily agree to the transfer of 10,000 speakers from the Audio Division to the Hi-Fi Division

NO

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

As the division is operating at capacity , the minimum transfer price is > the outside market quote .

so, the transfer should not take place.

It is cheaper to procure from outside.