Question

Selling price per unit on the intermediate market Variable costs per unit Fixed costs per unit (based on capacity) Capacity in units $ $ 100 82 8 25,000 Sako Company has a Hi-Fi Division that could use this speaker in one of its products. The Hi-Fi Divisic year. It has received a quote of $97 per speaker from another manufacturer. Sako Company evaluate of divisional profits. Required: 1. Assume the Audio Division sells 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 b. From the standpoint of the Hi-Fi Division, what is the highest acceptable transfer price for speakers Division? c. What is the range of acceptable transfer prices (if any) between the two divisions? If left free to nego you expect the division managers to voluntarily agree to the transfer of 5,000 speakers from the Audi d. From the standpoint of the entire company, should the transfer take place? 2. Assume the Audio Division is selling 22,500 speakers per year to outside customers. a. From the standpoint of the Audio Division, what is the lowest acceptable transfer price for speakers b. From the standpoint of the Hi-Fi Division, what is the highest acceptable transfer price for speakers Division? c. What is the range of acceptable transfer prices (if any) between the two divisions? If left free to negot you expect the division managers to voluntarily agree to the transfer of 5,000 speakers from the Audio d. From the standpoint of the entire company, should the transfer take place?

Answer 1

Let's start

Here the fixed cost per unit is based on the capacity.So

Capacity =25000

Fixed cost per unit = 8

Total fixed cost = 200000

Now let's take each situation

1) when audio division sells only 20000 units

Then Fixed cost per unit will be

Total fixed cost = 200000

Number of units = 20000

Fixed cost per unit = 10

Variable cost per unit = 82

Total cost = 92

a) The lowest acceptable price is 92 which is cost of the audio department

b) The highest acceptable price for Hi Fi division will be the lowest price at which speaker is available in the open market which is 97

c)The range of acceptable price range will be 92 to 97 .Since the capacity of the audio division is 25000 and only 20000 is sold to outside the order of 5000 quantity will be accepted by the divisional manager

d)From the point of view of company the Transfer should take place

2) When the audio department sells 22500 to outside customers

Total fixed cost = 200000

Number of units = 22500

Fixed cost per unit = 8.88

Variable cost per unit = 82

Total cost = 90.88

a)The lowest acceptable price is 90.88 which is cost of the audio department

b)The highest acceptable price for Hi Fi division will be the lowest price at which speaker is available in the open market which is 97

c) The range of acceptable price range will be 90.88 to 97. Since the capacity of the audio division is 25000 and already it can sells 22500 to outsider for an higher price the divisional manager of audio division will not accept the offer.

d) From the point of view of company the transfer must takes place because it will reduce the cost of Hi Fi division and utilise the balance production capacity of Audio division