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 Variable costs per unit Fixed costs per unit (based on capacity) Capacity in units A A A 60 42 8 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?

Answer 1

Answer: Summortized the data and information in the question; Sako Companije Audio Division--- given 0 Spare capacity = 5,000 units. a) Lowest acceptable transfer price for Audio division = variable cost per unit & 42 b) Highest acceptable transfer porce is equal to the price paid to outside manufactuber $57 per unit c) Acceptable gange = $4240$57 Yes, they will agree. d) Yes, from the standpoint of the entite company they transfer take place. @ Spare Capacity 2500: units. a) Lowest acceptable toansfer poice is equal to the market price se, $60 per unit for lost sales and 442 for spate capacity lee average price of $51 per unit. b) Highest acceptable transfeo price is equal to the porce paid to outside manufacturer = $57 per unit: c) Acceptable range $51 to $57 Yes, they will agree.

9 d) Yes, from the standpoint of the entire company they transfer take place. Spate capacity • units a) Lowest acceptable transfer proces equal to the maroket poice ie, $60 per b) Highest acceptable toansfer price is equal to the price paid to outside manufacturer $57 per unit © No acceptable range. No, they will not agreee. unit NO.
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