E7–5 Time allowed: 30 minutes Sako Company’s Audio Division produces a speaker that is widely used by manufacturers of various audio products. Sales and cost data on the speaker follow:

Sako Company has just organized a Hi-Fi Division that could use this speaker in one of its products. The Hi-Fi Division will need 5,000 speakers per year. It has received a quote of £57 per speaker from another manufacturer. Sako Company evaluates divisional managers on the basis of divisional profits.
Required 1 Assume that the Audio Division is now selling only 20,000 speakers per year to outside customers on the intermediate market.
2

(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 purchased 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 5,000 speakers from the Audio Division to the Hi-Fi Division? Why or why not?

(d) From the standpoint of the entire company, should the transfer take place? Why or why not?
3 Assume that the Audio Division is selling all of the speakers it can produce to outside customers on the intermediate market.
4

(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 purchased 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 5,000 speakers from the Audio Division to the Hi-Fi Division? Why or why not?

(d) From the standpoint of the entire company, should the transfer take place? Why or why not?

Transcribed Image Text:

Selling price per unit on the intermediate market Variable costs per unit Fixed costs per unit (based on capacity) Capacity in units 60 42 8 25,000