Exercise 11A-1 Transfer Pricing Basics [LO11-5] Sako Company\'s Audio Division p
ID: 2563546 • Letter: E
Question
Exercise 11A-1 Transfer Pricing Basics [LO11-5] 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 $43 $ 18 55,000 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 $30 per speaker from another manufacturer. Sako Company evaluates division managers on the basis of divisional profits.Explanation / Answer
1.
A. Because there is enough idle capacity to fill the entire order from Hi-Fi division, no outside sales is lost. Variable cost per unit is $18, the lowest acceptable transfer price as far as the selling division is also $18.
B.
The Hi-Fi division can buy a similar speaker from an outside supplier for $30. Therefore , the Hi-Fi division would be unwilling to pay more than $30 per speaker.
C.
Seeing the requirements of both division , the acceptable range of transfer price would be:
$18<transfer price<$30
Assuming that managers understand their own businesses and that they are cooperative , they should be able to agree on a transfer price within this range and the transfer should take place.
D. From the standpoint of the entire company, the transfer should take place. The cost of speaker transferred is only $18 and the company saves $30 cost of the speakers purchased from the outside supplier.
2.
A. Each of the unit transferred to Hi-Fi division must displace a sale to an outsider at a price of $43. Therefore selling division would demand a transfer price of at least $43 .
B. Hi-Fi division would be unwilling to pay more than $30 per speaker.
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