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	$	43
Variable costs per unit	$	20
Fixed costs per unit (based on capacity)	$	6
Capacity in units		59,000

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 $33 per speaker from another manufacturer. Sako Company evaluates division managers on the basis of divisional profits.

Required:

1. Assume that the Audio Division is now selling only 49,000 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?

Transfer Price ≥

b. From the standpoint of the Hi-Fi Division, what is the highest acceptable transfer price for speakers acquired from the Audio Division?

Transfer Price

c. 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?

yes

no

Answer 1

Answer
										1.a	Because there is enough idle capacity to fill the entire order from Hi-Fi division, no outside sales is lost. Variable cost per unit is $20, the lowest acceptable transfer price as far as the selling division is also $20.
1.b	The Hi-Fi division can buy a similar speaker from an outside supplier for $33. Therefore , the Hi-Fi division would be unwilling to pay more than $33 per speaker.
1.c	Seeing the requirements of both division , the acceptable range of transfer price would be:
	$20<transfer price<$33
	Assuming that 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.
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