Sako Company\'s Audio Division produces a speaker that is used by manufacturers
ID: 2592370 • Letter: S
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 Fixed costs per unit (based on capacity) Capacity in units 49 19 unit 64,000 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 $37 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 53,000 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
Formula to calculate lowest transfer price:
Transfer price variable cost per unit+(total contribution margin on lost sales/number of units transferred)
1.
A. As here is enough idle capacity to fill the entire order,so no outside sales are lost so lowest transfer price would be:
Transfer price $19+($0/11,000)
=$19
B.
Hi-Fi division can buy similar speaker from an outside supplier for $37. Therefore highest acceptable transfer price for Hi-Fi division would be:
Transfer price37
C. There is a range of acceptable transfer prices as shown below:
$19Transfer price$37
Yes , 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 transfer should take place.
D.
From the standpoint of entire company, the transfer should take place. The cost of speakers transferred is only $19 and the company saves the $37 cost of the speaker's purchased from outside supplier.
2.
A.
Transfer price $19+{[($49-$19)/11000]/11000}
Transfer price$49
Lowest acceptable transfer price$49
B. As before, Hi-Fi division would be unwilling to pay more than $37 per speaker. There us birange if acceptable transfer price.
No.Managers are not likely to agree on a transfer price.
D.
From the standpoint of entire company, the transfer should not take place. By transferring a speaker internally, the company gives up revenue if $49 and saves $37 , for a loss of $12.
C. The requirements are incompatible. An agreement to transfer the speaker's is extremely unlikely.
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