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	$	17
Fixed costs per unit (based on capacity)	$	8
Capacity in units		63,000

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 $38 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 53,000 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

Answer

1.

a.

Minimum Transfer Price = $17

As we will be incurring only variable cost to produce more units, so if there is any demand for more product then company should demand at least $17 per unit.

b.

As thy can buy this product outside at $38 per unit, so Transfer price is maximum $38 per unit,

c.

As the Minimum transfer price for Audio Division is $17 and Maximum acceptance price for Hi-Fi division is $38, so they can agree the price between 17 and 38.

d.

Yes.

2.

a.

If Division A is operating at full capacity that means that means they can sell the whole product outside for $46, so why sell for less.

Minimum Transfer price = $46

b.

Highest transfer price is $38

c.

As the Minimum transfer price for Audio Division is $46 and Maximum acceptance price for Hi-Fi division is $38, so they can’t agree the price.

d.

No, as if they cannot agree on Minimum transfer price of $46 as they are getting the product at $38 from outside.

And it will be loss for the company as they can sell for more price and Hifi division can purchase for less.

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