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 19 56,000 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 $38 per speaker from another manufacturer. Sako Company evaluates division managers on the basis of divisional profits Required: 1. Assume the Audio Division is now selling only 47,000 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 9,000 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 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 9,000 speakers from the Audio Division to the Hi-Fi Division? d. From the standpoint of the entire company, should the transfer take place?

Explanation / Answer

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1.a.

1.b.

1.c.

1.d.

2.a.

2.b.

1.c.

1.d.

1. Assume that the Audio Division is now selling only 47,000 speakers peryear to outside customers.

1.a.

Lowest Acceptable price from Audio division will be variable cost $19 since this is still idle capacity and division will be concerned with cost incurred only.

1.b.

Highest Acceptable price from Hi-fi division will be $38 which they are able to pruchse from outside. They will not be paying more than that price

1.c.

Range 38 >Transfer Price> 19 They should be able to agree somwhere between 19 and 38

1.d.

From the stand point of company, transfer should take place. Manufacturing cost is just $19 compared to $38 purchse price 2. Assume that the Audio Division is now selling only all speakers peryear to outside customers.

2.a.

Since all speakers can be sold outside, Audio division have to loss the sale of 9000 speaker in order to sell it to Hi-FI division. Hence minimum acceptable price will be selling price which they will be lossing i.e. $44

2.b.

Highest Acceptable price from Hi-fi division will be $38 which they are able to pruchse from outside. They will not be paying more than that price

1.c.

There is not acceptable range as Audio division will not sell below 44 and Hi-fi will not buy above 38 Managers are likely not to agree on a transfer price.

1.d.

From the stand point of company, transfer should take place. Make Cost Buy Cost Purchase Price 0 38 Selling Price 44 0 Variable Cost 19 0 Contribution 25 Contribution lost is $25 only, which is way less than buy cost of $38. Hence transfer should take place

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