Question

xercise 11A-1 Transfer Pricing Basics [LO11-5]

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	$	18
Fixed costs per unit (based on capacity)	$	8
Capacity in units		62,000

Sako Company has a Hi-Fi Division that could use this speaker in one of its products. The Hi-Fi Division will need 9,000 speakers per year. It has received a quote of $31 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 9,000 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 9,000 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) Capacity 62000 units , Selling to outside customers 53000 units :-

(a)Capacity 62000 units

     Spare capacity = 62000 – 53000 = 9000 units

Lowest acceptable transfer price for speakers sold to the Hi-Fi Division from the standpoint of the Audio Division = Variable cost per unit only due to spare capacity of 9000 units

      = $ 18 per speaker

(b) Highest acceptable transfer price for speakers acquired from the Audio Division from the standpoint of the Hi-Fi Division = Quote of another manufacturer

                             =$ 31 per speaker

(c) Range:-

             $ 31>= Transfer Price >= $ 18

Yes, the division managers to voluntarily agree to the transfer of 9,000 speakers from the Audio Division to the Hi-Fi Division.

(d)       Profit to company as a whole due to transfer 9000 speaker to HiFi Division

                      = (31 – 18) * 9000 = $ 117000

Yes, the transfer take place from the standpoint of the entire company

(2) Capacity 62000 units , Selling to outside customers 62000 units :-

(a) No Spare capacity

Lowest acceptable transfer price for speakers sold to the Hi-Fi Division from the standpoint of the Audio Division = Selling price per unit on the intermediate market due to no spare capacity   

                   = $ 46 per speaker

(b) Highest acceptable transfer price for speakers acquired from the Audio Division from the standpoint of the Hi-Fi Division = Quote of another manufacturer

                             =$ 31 per speaker

(c) Range:-

           No Range

No, the division managers would not voluntarily agree to the transfer of 9,000 speakers from the Audio Division to the Hi-Fi Division.

(d)       Profit/Loss to company as a whole due to transfer 9000 speaker to HiFi Division

                      = (46 – 31) * 9000 = ($ 135000)

No, the transfer should not take place from the standpoint of the entire company