Exercise 11A-1 Transfer Pricing Basics [LO11-5] Sako Company’s Audio Division pr
ID: 2467888 • Letter: E
Question
Exercise 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:
Selling price per unit on the intermediate market $43
Variable costs per unit $16
Fixed costs per unit (based on capacity) $8
Capacity in units 61,000 Sako Company has a Hi-Fi Division that could use this speaker in one of its products. The Hi-Fi Division will need 10,000 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 51,000 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?
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 10,000 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 10,000 speakers from the Audio Division to the Hi-Fi Division?
From the standpoint of the entire company, should the transfer take place?
b.From the standpoint of the Hi-Fi Division, what is the highest acceptable transfer price for speakers acquired from the Audio Division?
Explanation / Answer
1. Assume that the Audio Division is now selling only 51,000 speakers per year to outside customers.
1. a. From the standpoint of the Audio Division, what is the lowest acceptable transfer price for speakers sold to the Hi-Fi Division? The Answer is $ 16 (Variable Cost per unit)
1.b. From the standpoint of the Hi-Fi Division, what is the highest acceptable transfer price for speakers acquired from the Audio Division? The Answer is $ 35 (Variable Cost $ 16 + Profit $ 19)
1.c.If left free to negotiate without interference, would you expect the division managers to voluntarily agree to the transfer of 10,000 speakers from the Audio Division to the Hi-Fi Division? The Answer is YES
1.d. From the standpoint of the entire company, should the transfer take place? The Answer is YES
2. Assume that the Audio Division is selling all of the speakers it can produce to outside customers.
2.a. From the standpoint of the Audio Division, what is the lowest acceptable transfer price for speakers sold to the Hi-Fi Division? The Answer is $ 24 (Varaible cost $ 16 + Fixed Cost $ 8)
2.b. From the standpoint of the Hi-Fi Division, what is the highest acceptable transfer price for speakers acquired from the Audio Division? The Answer is $ 43
2.c. If left free to negotiate without interference, would you expect the division managers to voluntarily agree to the transfer of 10,000 speakers from the Audio Division to the Hi-Fi Division? The Answer is NO.
2.d From the standpoint of the entire company, should the transfer take place? The Answer is NO
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