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	$	44
Variable costs per unit	$	20
Fixed costs per unit (based on capacity)	$	8
Capacity in units		58,000

Sako Company has a Hi-Fi Division that could use this speaker in one of its products. The Hi-Fi Division will need 12,000 speakers per year. It has received a quote of $36 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 46,000 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 12,000 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 12,000 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

Answer to 1st:

a. Lowest acceptable transfer price for Audio Division is $20 which is equal to the variable cost of producing speakers since there is spare capacity.

b. Highest acceptable transfer price for Hi-Fi division is $36 as that is the price at which Hi-Fi division can acquire the speakers from the market/outside supplier.

c. Range of acceptable transfer price = $20 to $36.

If left free to negotiate without interference, I would expect the division managers to voluntarily agree to the transfer of 12,000 speakers from the Audio Division to the Hi-Fi Division since Audio Division has spare capacity and can any price above $36 and Hi-Fi division will also be willing to pay any amount below $36.

d. From the standpoint of the company the transfer should take place as it generates the following additional revenue:

Purchase price from outside supplier = $36

Less: Variable costs of manufacturing speaker = $20

Gain to the company per speaker = $16

Total gain to the company = $16 * 12,000 speakers = $192,000

Answer to 2nd:

a. Lowest acceptable transfer price for Audio Division is $44 which is equal to the rate it is currently selling to outside customers since it is operating at full capacity.

b. Highest acceptable transfer price for Hi-Fi division is $36 as that is the price at which Hi-Fi division can acquire the speakers from the market/outside supplier.

c. There is no range of acceptable prices in this case.

If left free to negotiate without interference, I would not expect the division managers to voluntarily agree to the transfer of 12,000 speakers from the Audio Division to the Hi-Fi Division since Audio Division's lowest acceptable transfer price if $44 which is higher than the Hi-Fi Divison's highest acceptable transfer price of $36.

d. From the standpoint of the company the transfer should not take place as it generates the following loss:

Loss in revenue by selling to Hi-Fi Division = 12,000 speakers * ($44-$36)

Loss = $96,000