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	$	16
Fixed costs per unit (based on capacity)	$	8
Capacity in units		66,000
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 $33 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 54,000 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

Solution:

1 a) The lowest acceptable transfer price from the perspective of the selling division is given by the following formula:

Therefore, the Lowest Acceptable Transfer Price as far as the Selling Division is $16.

b) The Hi-Fi division can buy a related speaker from an outside supplier for $33. Therefore, the Hi-Fi Division would be unwilling to pay more than $33 per speaker:

c) The selling division and the buying division, the acceptable range of transfer prices is as follows:

Therefore, the manager understands their own businesses and that they are cooperative, they have to agree on a transfer price within the range.

d)  The transfer should take place becuase the cost of the speakers transferred for $16 and the company saves the $33 cost of the speakers purchased from the outside supplier.

2 a) The lowest acceptable transfer price from the perspective of the selling division is given by the following formula:

The 12,000 units transferred to the Hi-Fi Division must displace a sale to an outsider at a price of $44. So, the Selling Division will order a Transfer price of at least of $44.

Therefore, the Lowest Acceptable Transfer Price as far as the Selling Division is $44.

b) The Hi-Fi division can buy a related speaker from an outside supplier for $33. Therefore, the Hi-Fi Division would be unwilling to pay more than $33 per speaker.

c) The selling and buying divisions requirements are incompatible. The selling division must have a price of at least $44 whereas the buying division will not pay more than $33. An agreement to transfer the speakers is extremely unlikely.

d) The Transfer should not take place because by Transfering a speaker internally, the company gives up the income of $44 and Saves $33, for a loss of $10.