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	$	49
Variable costs per unit	$	20
Fixed costs per unit (based on capacity)	$	6
Capacity in units		66,000

Sako Company has a Hi-Fi Division that could use this speaker in one of its products. The Hi-Fi Division will need 12,000 speakers per year. It has received a quote of $32 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 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?

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 12,000 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 12,000 speakers from the Audio Division to the Hi-Fi Division?

d. From the standpoint of the entire company, should the transfer take place?

Answer 1

1). Assuming Audio division is currently selling 54000 speakers to outside customers.
a). From the standpoint of audio division, lowest acceptable transfer price for 12000 units to HiFi division would be relevant cost i.e variable cost per unit of $20. Here the capacity is in excess hence fixed cost is already allocated to 54000 units.
b). From the standpoint of the Hi-Fi Division, the highest acceptable transfer price for speakers acquired from the Audio Division will be its cost from outside supplier i.e $32 per unit because this is the price it can pay to outside supplier for acquiring speakers.
c). Range of transfer prices is $20 to $32. If left free to negotiate without interference, it is expected for the division managers to voluntarily agree to the transfer of 12,000 speakers from the Audio Division to the Hi-Fi Division because HiFi divsion can buy at lower price than the ouside supplier and Audio division can sell its speakers which are not saleable to outside customers.
d).From the standpoint of entire company, the transfer should take place because it is beneficial for both the units. Audio division will utilise its vacant capacity for producing additional units and also HiFi division can buy those speakers all a less price than market. Which will benefit the company as a whole also.

2). Assuming Audio division can sell all its speakers to outside customers.
a). From the standpoint of audio division, lowest acceptable transfer price is its selling price to outside customers ie. $49 because it can sell all its speakers to outside at this price hence if audio division transfer to HiFi division then it must shift speakers from outside customer sales to interdivisional sales. This price includes its variable cost and the contribution lost of not selling to outside which totals to its selling price.
b). From the standpoint of the Hi-Fi Division, the highest acceptable transfer price for speakers acquired from the Audio Division is $32 because at this price it can buy from outside supplier hence it will not pay more than this for interdivisional transfers.
c). There is no range of acceptable transfer prices because the lowest acceptable transfer price of Audio Division is higher than the highest acceptable transfer price of HiFi division.If left free to negotiate without interference, it is not expected for the division managers to voluntarily agree to the transfer of 12,000 speakers from the Audio Division to the Hi-Fi Division because it will not in favour of any division.
d). From the standpoint of entire company, the transfer should not take place because Audio division is able to sell its speakers at higher price to outside customers while the HiFi division is able to buy speakers at lower price from outside suppliers. Interdivisional transfers will reduce the income of division and also impacts the profits of the company as a whole.