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: S60 $ 42 Selling price per unit on the intermediate market Variable costs per unit Fixed costs per unit (based on capacity) Capacity in units 25,000 Sako Company has a Hi-Fi Division that could use this speaker in one of its products. The Hi-Fi Division will need 5,000 speakers per year. It has received a quote of $57 per speaker from another manufacturer. Sako Company evaluates division managers on the basis of divisional profits. Required: 1. Assume that the Audio Division is now selling only 20,000 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? Transfer price 2 b. From the standpoint of the Hi-Fi Division, what is the highest acceptable transfer price for speakers acquired from the Audio Division? Transfer price

Explanation / Answer

1. a. Transfer price >= 42

Lowest transfer price will be variable cost of the speaker, because it's outside sale is only 20,000 units.

1. b. Transfer price $57.

Highest transfer price will be $57, because it has received a quote of $57 per speaker from another manufcturer.

1. c. yes

Audio division's variable cost of manufacturing is 42 only and Hi-Fi Division purchase price will be 57.

1. d. Transfer should take place.

Audio division has the capacity of 25,000 units, but currently it is selling only 20,000 units to outsiders and Hi-Fi division has the requirement of 5,000 units.

2. a. Transfer price >= 60.

Selling price per unit will be the transfer price.

2. b. Transfer price 57.

Hi-Fi Division has received a quote from another manufacture for $57.

2. c. No.

Transfer price will not be acceptible for the two division.

2. d. Transfer should not take place.

The company can earn more profit without transfering.

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