xercise 11A-1 Transfer Pricing Basics [LO11-5] Sako Company’s Audio Division pro
ID: 331598 • Letter: X
Question
xercise 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:
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.
Assume that the Audio Division is now selling only 20,000 speakers per year to outside customers.
From the standpoint of the Audio Division, what is the lowest acceptable transfer price for speakers sold to the Hi-Fi Division?
From the standpoint of the Hi-Fi Division, what is the highest acceptable transfer price for speakers acquired from the Audio Division?
If left free to negotiate without interference, would you expect the division managers to voluntarily agree to the transfer of 5,000 speakers from the Audio Division to the Hi-Fi Division?
From the standpoint of the entire company, should the transfer take place?
Assume that the Audio Division is selling all of the speakers it can produce to outside customers.
From the standpoint of the Audio Division, what is the lowest acceptable transfer price for speakers sold to the Hi-Fi Division?
From the standpoint of the Hi-Fi Division, what is the highest acceptable transfer price for speakers acquired from the Audio Division?
If left free to negotiate without interference, would you expect the division managers to voluntarily agree to the transfer of 5,000 speakers from the Audio Division to the Hi-Fi Division?
From the standpoint of the entire company, should the transfer take place?
xercise 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:
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.
Assume that the Audio Division is now selling only 20,000 speakers per year to outside customers.
From the standpoint of the Audio Division, what is the lowest acceptable transfer price for speakers sold to the Hi-Fi Division?
From the standpoint of the Hi-Fi Division, what is the highest acceptable transfer price for speakers acquired from the Audio Division?
If left free to negotiate without interference, would you expect the division managers to voluntarily agree to the transfer of 5,000 speakers from the Audio Division to the Hi-Fi Division?
Yes NoFrom the standpoint of the entire company, should the transfer take place?
Transfer should take place. Transfer should not take place.Assume that the Audio Division is selling all of the speakers it can produce to outside customers.
From the standpoint of the Audio Division, what is the lowest acceptable transfer price for speakers sold to the Hi-Fi Division?
From the standpoint of the Hi-Fi Division, what is the highest acceptable transfer price for speakers acquired from the Audio Division?
If left free to negotiate without interference, would you expect the division managers to voluntarily agree to the transfer of 5,000 speakers from the Audio Division to the Hi-Fi Division?
Yes NoFrom the standpoint of the entire company, should the transfer take place?
Transfer should take place. Transfer should not take place.Explanation / Answer
Answer 1A:- Transfer Price = Variable cost per unit + Total Contribution margin on lost sales/ number of units transferred
As there is no idle capacity so that the entire order can be fulfilled , no outside sales will be lost. And as the variable cost is $42 per unit, the lowest acceptable transfer price is given as
Transfer price = $42+0/5000 = $42
Answer 1B:- The similar speakers can be bought from an outside supplier for a price for $57 thus the Hi-Fi division will not look to pay more than %57 per unit of speakers.
Answer 1C:- By adding the requirements of selling department and buying department the acceptable range of transfer can be given as
$42<transfer pricing<$57
. As we can expect that the business will be understood by the managers and they are cooperative thus the transfer price should be accepted in this range and therefore the transfer should result. So the answer is
YES.
Answer 1D:- The transfer should take place.
Reason:- The cost of the speaker is $42 while the saving of the company is $57 which is the cost of the speakers bough from outside suppliers.
Answer 2A:- Transfer Price = $42+ ($60 -$42)*5000/5000
Transfer Price =$42 +($60-$42)= $60
Answer 2B:- The Hi-Fi Division would be unwilling to pay more than $57 per speaker
If the price of more than $57 per speaker,Hi-Fi division will not pay. So the highest price paid is $57 per speaker.
Answer 2C:- There is no match between the requirements of both the division. The price should be at least $60 for the selling division while the prices more than $57 cannot be paid by other division. SO there will be no transfer.
Correct Answer:- NO
Answer 2D:- From the standpoint of entire firm, the transfer should not take place as there is a loss of $3 per speaker
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