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	$	60
Variable costs per unit	$	42
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 $57 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 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 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 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

ANSWER:

1. WHEN AUDIO DIVISION IS SELLING ONLY 20000 SPEAKERS TO OUTSIDE CUSTOMERS:
   1. From the standpoint of the Audio Division, the lowest acceptable transfer price for speakers sold to the Hi-Fi Division would be $42.
      • The reason for the same is that the audio division’s capacity to produce speakers is 25000 while only 20000 would be sold to outside markets.
      • Hence it can produce remaining 5000 speakers without incurring any extra fixed cost
      • So that, only extra variable cost of $42 would incurred for production of 5000 speakers
      • Therefore, it would become transfer price for audio division
   2. From the standpoint of the Hi-Fi Division, the highest acceptable transfer price for speakers acquired from the Audio Division would be $57.
      • The reason for the same is that the HI-Fi division can purchase speakers from outside market at $57 if the transfer price from audio division is more than $57
   3. the range of acceptable transfer prices between the two divisions would be between $42 and $57,If left free to negotiate without interference
      • The division managers should allow voluntarily negotiating in between these two prices to the transfer of 5,000 speakers from the Audio Division to the Hi-Fi Division.
   4. From the standpoint of the entire company, the transfer should take place as there would be benefit to the whole company. Because the outside market price of speakers is $57 while audio division can transfer the same below this price, hence it would reduce cost of entire company and increase profitability.
2. WHEN AUDIO DIVISION IS SELLING ALL SPEAKERS TO OUTSIDE CUSTOMERS:
   1. From the standpoint of the Audio Division, the lowest acceptable transfer price for speakers sold to the Hi-Fi Division would be $60.
      • The reason for the same is that audio division is able to sell all speakers produced by it to outside customers
      • Hence, it would be at loss if it charges any price below $60 which is paid by outside customer
   2. From the standpoint of the Hi-Fi Division, the highest acceptable transfer price for speakers acquired from the Audio Division would be $57.
      • The reason for the same is that the HI-Fi division can purchase speakers from outside market at $57 if the transfer price from audio division is more than $57
   3. The range of acceptable transfer prices between the two divisions would be between $57 and $60,If left free to negotiate without interference. But there are no chances of agreeing between these two prices.
   4. From the standpoint of the entire company, the transfer should not take place as company would be benefited if audio division sells the entire production at $60 and Hi-Fi division purchases 5000 speakers from outside markets at $57. Hence, there would be total cost reduction to the entire company.