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Sako Company's Audio Division produces a speaker that is used by manufacturers of various audio...

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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 $48
Variable costs per unit $18
Fixed costs per unit (based on capacity) $6
Capacity in units 67,000

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 $37 per speaker from another manufacturer. Sako Company evaluates division managers on the basis of divisional profits.

Assume that the Audio Division is now selling only 55,000 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. 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?

Transfer Price

In multi divisional organizations, the output of one division becomes the input of another division. Transfer price is the price at which goods or services are transferred from one division to another division of the same company.

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Answer a

The selling ( Audio) division has a capacity of 67,000 speakers. It is selling only 55,000 speakers to outside customers.It does not have an...

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Negotiated Transfer Pricing: Definition & Examples

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Chapter 10 / Lesson 6
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Negotiated transfer pricing is where company representatives negotiate prices themselves, not basing purely on market prices. Learn several advantages and disadvantages to using negotiated transfer pricing demonstrated through two companies' negotiations.


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