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: $ 43 $ 18 Selling price per unit on the intermediate market Variable costs per unit Fixed costs per unit (based on capacity) Capacity in units 61,000 Sako Company has a Hi-Fi Division that could use this speaker in one of its products. The Hi-Fi Division will need 8,000 speakers per year. It has received a quote of $33 per speaker from another manufacturer. Sako Company evaluates division managers on the basis of divisional profits.

Explanation / Answer

Situation 1 - 53000 units sale to outside customer

A. The lowest acceptable transfer cost to Audio division is equal to variable cost $18

Explanation-

1. Audio division is transferring to Hi Fi division from its ideal capacity 8000 qty. (Total capacity 61000qty - Sale 53000 qty)

2. Outside sale demand not affected by this.

3. Fixed cost is irrelevant as this has been incurred eventhough irrespective of this transfer

B. Highest acceptable price for Hi Fi division is $33 i.e. minimum market quote.

C. Acceptable transfer price range will be $ 18 and $ 33

Divisioal manager should agree for this transfer within transfer range.

D. From company point of view this transfer should take place. To purchase 8000 speakers from.outside they need to incurred $33 but if inter division transfer take place then cost to company will be $ 18 only.

Company will save $15 per speaker

Situation 2 - All speaker sale to outside customer

A. lowest acceptable transfer price For audio division will be equal to $34 (Sale price $43 - fixed cost $9)

Fixed cost is irrelevant for this as it has been incurred in any situation

B Maximum acceptable transfer price for Hi Fi division will be $33

C.Acceptable transfer price range will be between $33 and $34

Divisional manager should not accept this

D. From company point of view this transfer should not take place as company as whole will loss $1 per unit by this.

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