Sako Company\'s Audio Division produces a speaker that is used by manufacturers

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 $45 $18 $9 64,000 Sako Company has a Hi-Fi Division that could use this speaker in one of its products. The Hi-Fi Division will need 9,000 speakers per year. It has received a quote of $36 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 55,000 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

Explanation / Answer

1a) Transfer price

Since it has extra capacity it’s acceptable minimum price will be equal to its variable cost

$18

b) this is what it pays to outside parties

$36

c)

Yes

d)

Transfer should take place

2a)when it is working at full capacity it will not accept anything beyond its selling price

$45

b)

$36

c)

No

d)

Transfer should not take place

1a) Transfer price

Since it has extra capacity it’s acceptable minimum price will be equal to its variable cost

$18

b) this is what it pays to outside parties

$36

c)

Yes

d)

Transfer should take place

2a)when it is working at full capacity it will not accept anything beyond its selling price

$45

b)

$36

c)

No

d)

Transfer should not take place

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