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	$	42
Variable costs per unit	$	16
Fixed costs per unit (based on capacity)	$	8
Capacity in units		56,000

Sako Company has a Hi-Fi Division that could use this speaker in one of its products. The Hi-Fi Division will need 11,000 speakers per year. It has received a quote of $37 per speaker from another manufacturer. Sako Company evaluates division managers on the basis of divisional profits.

Required:

1. Assume that 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. If left free to negotiate without interference, would you expect the division managers to voluntarily agree to the transfer of 11,000 speakers from the Audio Division to the Hi-Fi Division?

	Yes
	No

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

	Transfer should take place.
	Transfer should not take place.

2. Assume that 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. If left free to negotiate without interference, would you expect the division managers to voluntarily agree to the transfer of 11,000 speakers from the Audio Division to the Hi-Fi Division?

	No
	Yes

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

	Transfer should take place.
	Transfer should not take place.

Answer 1

Requirement 1.

a). As there is a Excess Capacity, the Audio Division will not have any opportunity loss.

That means the Lowest acceptable transfer price = variable cost of production

= $ 16

b). Highest Acceptable Transfer price for Hi-fi Division is cost of purchasing the speakers from the outside market.

That is $ 37   

c). Yes,

The division manager will voluntarily accept the transfer to Hi-fi division as the audio division has excess capacity.

d).  From the standpoint of the entire company, Transfer should take place.

As it is beneficial to the company of $11(37-16). Transfer should take place.

Requirement 2.

a). As there is no Excess capacity, the audio division will incur opportunity loss of $ 26 (42-16)

That means the Lowest acceptable transfer price = variable cost of production+opportunity lost = 16+26 =$ 42

b).

Highest Acceptable Transfer price for Hi-fi Division is cost of purchasing the speakers from the outside market.

That is $ 37   

c). No,

  The division manager will not voluntarily transfer to HI-fi division as the divisional manager is not getting the minimum transfer price.

d). From the standpoint of the entire company, Transfer shouldn't take place.

As the company has a whole is not getting benefited. the company will loose $ 5(42-37) if transfer takes place