Exercise 12A-1 Transfer Pricing Basics [LO12-5] Sako Company\'s Audio Division p

Question

Exercise 12A-1 Transfer Pricing Basics [LO12-5] 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 $ 60 $ 42 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 that the Audio Division is now selling 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? Transfer price 2 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

Explanation / Answer

1b. $57 per unit will be the highest acceptable price as Hi-Fi division can buy from outside vendor at @ $57 per speaker

1d)

Yes , from standpoint of company, the transfer should take place as it will reduce the cost.

2a)

Which is equal to lost sales of $ 60 per unit on the 5000 units.

2b.

$57 per unit will be the highest acceptable price as Hi-Fi division can buy from outside vendor at @ $57 per speaker.

2c)

There is not a range of acceptable transfer prices, the managers are not likely to agree on the transfer.

2d)

From the standpoint of the entire company, the transfer should not
take place. By transferring a speaker internally, the company gives up
revenue of $60 and saves $57, for a loss of $3.

Dear Student,

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1a No. of Units 5000 Per Unit Amount Variable Cost 42        210,000.00 Minimum Transfer Price        210,000.00 Minimum Transfer Price per Unit                  42.00

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