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	$	46
Variable costs per unit	$	21
Fixed costs per unit (based on capacity)	$	7
Capacity in units		62,000

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 $29 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 54,000 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?

2. Assume that 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?

Answer 1

Answer 1a:

Since the audio division has spare capacity of 8,000 units, therefore, the lowest acceptable price would be the variable cost i.e. $ 21 for every unit.

Answer 1b:

The highest acceptable transfer price would be the selling price of the product i.e. $ 29 per unit.

Answer 2a:

Since the audio division does not have any spare capacity,

It will charge a minimum of the selling price in the intermediate market, i.e. $ 46 per unit.

Answer 2b:

The highest acceptable transfer price would be the selling price of the product i.e. $ 29 for every unit.

In case of any doubt, please feel free to comment.