Exerclse 11A-1 Transfer Pricing Baslcs [LO11-5] Sako Company\'s Audio Division p
ID: 2579331 • Letter: E
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Exerclse 11A-1 Transfer Pricing Baslcs [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 10 points Selling price per unit on the intermediate market Variable costs per unit Fixed costs per unit (based on capacity) Capacity in units 19 eBook 59,808 Sako Company has a Hi-FiDivision 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. Print Required: 1. Assume the Audio Division is now selling only 50,000 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? References 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 (f 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? Complete this question by entering your answers in the tabs below. Req 1A Req 1B Req 1C Req 1D Req 2A Req 2B Req 2C Req 2D From the standpoint of the Audio Division, what is the lowest acceptable transfer price for speakers sold to the Hi-Fi Division? Assume the Audio Division is now selling only 50,000 speakers per year to outside customers.Explanation / Answer
1.
A. Lowest acceptable transfer price is $19(variable cost per unit)
Because idle capacity is available to fill the entire order and no outside sales is lost due to this order, the lowest acceptable transfer price for the selling division would be variable cost per unit which is $19 here.
1.b.
Highest acceptable transfer price for Hi-Fi division would be $36 per unit, because Hi-Fi division can buy a similar speaker from an outside supplier for $36.
1c.
Combining the requirements of both the divisions, the acceptable range of transfer pricing should be:
$19<transfer price<$36
Assuming managers understand their own business and they are cooperative, they will be able to agree on a transfer price within this range and transfer should take place.
1.d.
Yes, transfer should take place. The cost of speaker transferred is only $19 and the company saves the $36 cost of speakers purchased from outside suppliers.
2.
A. Each unit transferred to Hi-Fi division must displace a sale to an outsider at a price of $47. Therefore, the selling division would demand a transfer price of atleast $47.
B.
Hi-Fi division would be unwilling to pay more than $36 per speaker(same reason as 1.b.)
2.c
The requirements of both the division are incompatible. Selling division want atleast $47 and buying division will not pay more than $36. An agreement to transfer the speaker is extremely unlikely.
2.d.
No. The transfer should not take place. By transferring internally, the company gives up revenue of $47 and saves $36, a loss of $11 to the company overall.
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