Exercise 11A-1 Transfer Pricing Basics [L011-5] Sako Company\'s Audio Division p
ID: 2591002 • Letter: E
Question
Exercise 11A-1 Transfer Pricing Basics [L011-5] 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 Variable costs per unit Fixed costs per unit (based on capacity) Capacity in units $46 $ 18 56,000 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 $36 per speaker from another manufacturer. Sako Company evaluates division managers on the basis of divisional profits.
Explanation / Answer
Assume that Audio Division now selling only 46,000 units to outsider.
1A. Lowest Acceptable Transfer Price for Audio Dividion is $ 26 Per unit (Variable Cost + Fixed Cost) Because Audio divisio must get his All cost recovered therefor the price should be on cost basis.
1B. Highest Acceptable Transfer Price for Hi-Fi Division is $ 36 Per Unit that is the price which he pays to the outsider to get what he needed that why its the highest acceptable price.
1C. There is a range of acceptable transfer price show below
It should be between More than 26 but Less than 36 as calculated in 1A and 1B. and yes manager has to be agreed between those two rate of transfer price.
1D. Transfer should take place because it is benificialy to company because outsider geting $ 10 per unit as margin if Hi fi Division purchase from Outsider and Audio division not recover $ 80,000 of Fixed cost on unsold unit i,e 10,000units * $ 8 per unit. by transfer internally company shave $ 1,80,000 ( Margin on Outside seller and Unabsobed Fixed Cost)
Assume that Audio Division sale whole 56,000 units to outsider.
2A. Lowest Acceptable Transfer Price for Audio Dividion is $ 46 Per unit Because Audio divisio geting this price By selling whole unit so it will not accept less than this..
2B. Highest Acceptable Transfer Price for Hi-Fi Division is $ 36 Per Unit that is the price which he pays to the outsider to get what he needed that why its the highest acceptable price.
2C. There is not a range acceptable for transfer price because audio division transfer price will make loss to hi-fi and vice versa. therefor manager of both division will not agreed to the transfer price.
2D. Transfer price should not take place because if taken place company any way loose $ 10 of extra margin or extra varible cost therfor company should sell is all unit of audio division $ 46 per unit to outsider and purchase its need from outsider at $ 36 per unit
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