Question

Exercise 11-3 (Static) Transfer Pricing Basics [LO11-3]

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 sells 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 22,500 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?

3. Assume the Audio Division is selling 25,000 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?

Req 1A and 1 B Req 1C Req 1D Req 2A and 2B Req 2c Req 2D Req 3A and 3B Req 30 Req 3D Assume the Audio Division is selling 22,500 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? Show less A a. $ 57 x Lowest acceptable transfer price Highest acceptable transfer price b. $ 57 < Req 1D Req 2C

Answer 1

Per unit contribution margin (60-42)	$                          18
Answer 1
Contribution margin lost on sales lost (Company have free unused capacity of 5,000) ((5000-5000)*18)	$                           -
Divided by: Annual speaker need to Hi-Fi Division	5,000
Oppurtunity cost per unit	$                           -
Add: Variable costs per unit	$                    42.00
Lowest acceptable transfer price	$                    42.00
From the standpoint of the Hi-Fi Division, what is the highest acceptable transfer price for speakers acquired from the Audio Division? (hint: Market price)	$                    57.00
What is the range of acceptable transfer prices (if any) between the two divisions?	42 to 57
Would manager agree or not?	Yes, Division manager will be agree.
From the standpoint of the entire company, should the transfer take place?	Yes, Transfer take places.
Answer 2
Contribution margin lost on sales lost (Company have free unused capacity of 2,500 = 25000 - 22500) ((5000-2500)*18)	$                 45,000
Divided by: Annual speaker need to Hi-Fi Division	5,000
Oppurtunity cost per unit	$                      9.00
Add: Variable costs per unit	$                    42.00
Lowest acceptable transfer price	$                    51.00
From the standpoint of the Hi-Fi Division, what is the highest acceptable transfer price for speakers acquired from the Audio Division?	$                    57.00
What is the range of acceptable transfer prices (if any) between the two divisions?	51 to 57
Would manager agree or not?	Yes, Division manager will be agree.
From the standpoint of the entire company, should the transfer take place?	Yes, Transfer take places.
Answer 3
Contribution margin lost on sales lost (Company have free unused capacity of 0 = 25000 - 25000) ((5000-0)*18)	$                 90,000
Divided by: Annual speaker need to Hi-Fi Division	5,000
Oppurtunity cost per unit	$                    18.00
Add: Variable costs per unit	$                    42.00
Lowest acceptable transfer price	$                    60.00
From the standpoint of the Hi-Fi Division, what is the highest acceptable transfer price for speakers acquired from the Audio Division?	$                    57.00
What is the range of acceptable transfer prices (if any) between the two divisions?	No range possible
Would manager agree or not?	No, Division manager will not be agree.
From the standpoint of the entire company, should the transfer take place?	No, Transfer should not take place.