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 Variable costs per unit Fixed costs per unit (based on capacity) Capacity in units $49 $ 17 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 12,000 speakers per year. It has received a quote of $31 per speaker from another manufacturer. Sako Company evaluates division managers on the basis of divisional profits

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

A. From the standpoint of Audio division

Lowest acceptable transfer price per unit

= variable cost + opportunity cost

= 17 + (49 - 17)

=17 + 32

= $ 49

B. Highest accepted transfer price by Hi-fi division

As there is another option to buy the speaker's at $31, Highest Accepted transfer price by Hi-fi division is $31

C. As the least accepted transfer price by Audio department is $49 and highest accepted transfer price by hi-fi department is $31. Which doesn't fall under the same range. So the departments will not settle for any agreement.

D. The selling price outside is $49, by transferring a speaker internally for $31, Audio department will suffer a loss of $18.

By transferring it for $49, hi-fi department will suffer the same loss.

Transfer should not take place.