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 $ 18 Fixed costs per unit (based on capacity) $ 7 Capacity in units 60,000 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 $34 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 48,000 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?

	Lowest acceptable transfer price

	Highest acceptable transfer price

	Identify the range of acceptable transfer prices (if any): There is not a range of acceptable transfer prices.radio button unchecked1 of 2 There is a range of acceptable transfer prices as shown below:radio button unchecked2 of 2 ≤ Transfer price ≤ Are the managers likely to agree on a transfer price? Yesradio button unchecked1 of 2 Noradio button unchecked2 of 2

From the standpoint of the entire company, should the transfer take place? Assume the Audio Division is now selling only 48,000 speakers per year to outside customers.

• 	Transfer should take place.radio button unchecked1 of 2 Transfer should not take place.radio button unchecked2 of 2

• From the standpoint of the Audio Division, what is the lowest acceptable transfer price for speakers sold to the Hi-Fi Division? Assume the Audio Division is selling all of the speakers it can produce to outside customers.

  	Lowest acceptable transfer price

• From the standpoint of the Hi-Fi Division, what is the highest acceptable transfer price for speakers acquired from the Audio Division? Assume the Audio Division is selling all of the speakers it can produce to outside customers.

  	Highest acceptable transfer price

  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? Assume the Audio Division is selling all of the speakers it can produce to outside customers.

  	Identify the range of acceptable transfer prices (if any): There is not a range of acceptable transfer prices.radio button unchecked1 of 2 There is a range of acceptable transfer prices as shown below:radio button unchecked2 of 2 ≥ Transfer price ≥ Are the managers likely to agree on a transfer price? Yesradio button unchecked1 of 2 Noradio button unchecked2 of 2

• From the standpoint of the entire company, should the transfer take place? Assume the Audio Division is selling all of the speakers it can produce to outside customers.

  	Transfer should take place.radio button unchecked1 of 2 Transfer should not take place.radio button unchecked2 of 2

Answer 1

Lowest acceptable transfer price
Transfer Price ≥ Variable Cost per unit + (Total contribution margin on lost sales / Number of units transferred
Transfer Price ≥ $18 + ($0 / 12000)	$       18.00
Lowest acceptable transfer price	$       18.00	(a)
Highest acceptable transfer price
Transfer price ≤ Cost of buying from outside supplier	$34	(b)
Identify the range of acceptable transfer prices (if any):
There is a range of acceptable transfer prices as shown below:
$                                                                                                                 18.00	≤	Transfer price	≤	$34
Are the managers likely to agree on a transfer price?
Yes	( c )
Assuming that the managers understand their own businesses and that they are cooperative, they should be able to agree on a transfer price within this range and the transfer should take place.
From the standpoint of the entire company, should the transfer take place? Assume the Audio Division is now selling only 48,000 speakers per year to outside customers.
Transfer should take place.
The cost of the speakers transferred is only $18  and the company saves the $34 cost of the speakers purchased from the outside supplier.
2)
From the standpoint of the Audio Division, what is the lowest acceptable transfer price for speakers sold to the Hi-Fi Division? Assume the Audio Division is selling all of the speakers it can produce to outside customers.
Transfer Price ≥ Variable Cost per unit + (Total contribution margin on lost sales / Number of units transferred
Transfer Price ≥ $18 + ($44 - $18 ) x 12000 / 12000)	$       44.00
Lowest acceptable transfer price	$       44.00
From the standpoint of the Hi-Fi Division, what is the highest acceptable transfer price for speakers acquired from the Audio Division? Assume the Audio Division is selling all of the speakers it can produce to outside customers.
Highest acceptable transfer price	$34
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? Assume the Audio Division is selling all of the speakers it can produce to outside customers.
Identify the range of acceptable transfer prices (if any):
There is not a range of acceptable transfer prices.
$                                                                                                                 44.00		≥	Transfer price	≥	$34
The requirements of the selling and buying divisions in this instance are incompatible. The selling division must have a price of at least $44 whereas the buying division will not pay more than $34. An agreement to transfer the speakers is extremely unlikely.
Are the managers likely to agree on a transfer price?
No
From the standpoint of the entire company, should the transfer take place? Assume the Audio Division is selling all of the speakers it can produce to outside customers.
Transfer should not take place
From the standpoint of the entire company, the transfer should not take place. By transferring a speaker internally, the company gives up revenue of $44 and saves 34, for a loss of $10