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 16 57,000 Sako Company has a Hi-Fi Division that could use this speaker in one of its products. The Hi-Fi Division will need 11,000 speakers per year. It has received a quote of $34 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 46,000 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 11,000 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 11,000 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

1A). From the standpoint of Audio Division, Lowest acceptable transfer price is $16 per unit, because it is only able to sell 46000 units to outsiders and there is vacant capactity of 11000 units for which only relevant cost must be charged.

1B).From the Standpoint of Hi-Fi Division, Highest acceptable transfer price is $34 per unit, because HiFi division is able to buy from outside at this price, more than this is not acceptable for HiFi division.

1C).Range of acceptable transfer price is $16 -$34. If left free to negotiate, I would expect that managers would agree to transfer 11000 units within divisions.

1D). From standpoint of company, transfer should take place within divisions, because it will benefit the company as a whole because, HIfi Dvision can acquire product at low price than outside competetors which will also benefit the Audio Division.

2A). From the standpoint of Audio Division, Lowest acceptable transfer price is $41 per unit, because it is selling 57000 units to outsiders and there is no vacant capactity. So the full price is relevant.

2B).From the Standpoint of Hi-Fi Division, Highest acceptable transfer price is $34 per unit, because HiFi division is able to buy from outside at this price, more than this is not acceptable for HiFi division.

2C).There is no range of acceptable transfer price. If left free to negotiate, I would not expect that managers would be able to transfer 11000 units within divisions.

2D). From standpoint of company, transfer should not take place within divisions, because it will not benefit to the company as a whole because, HIfi Dvision can acquire product at low price from outside competetors.

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