Andrea Cellular Technologies (ACT), which manufactures Bluetooth speakers, has two divisions Assembly and Finishing. The Assembly division completes all the electrical and technical aspects of the manufacturing process, while Finishing places the casing on the Bluetooth speakers. Both divisions have the capacity to produce 2 million speakers per annum, though they are currently operating at 75% of capacity.

Assembly is required to transfer the nearly complete Bluetooth speakers to Finishing at a predetermined transfer price of $110. Assemblys standard variable cost per unit it $90, with fixed costs of $20 per unit (based on budgeted production of 1,200,000). If it was allowed by head office, Assembly currently sells its nearly complete Bluetooth speakers to outside buyers at $130 per unit.

In placing the casings on the Bluetooth speakers, Finishing incurs costs of $40 per mobile ($20 of which are fixed costs calculated on budgeted production of 1200,000 speakers). Finishing sells all manufactured Bluetooth speakers to retailers for $160 per Bluetooth speakers.

Assembly has repeatedly brought to ACT head office attention the fact that if it was allowed it would be able to increase production to 1 million units a year (i.e., to full capacity) and sell all these units at $130 each to outside buyers. Consequently, ACT head office is considering making the two divisions fully autonomous and consequently allowing the managers of the two divisions to decide on a transfer price and how many, if any, units are transferred between divisions. The manager of the finishing department is arguing against this stating this would not be in the best interests of ACT.

Andrea Cellular Technologies (ACT), which manufactures Bluetooth speakers, has two divisions Assembly and Finishing. The Assembly division completes all the electrical and technical aspects of the manufacturing process, while Finishing places the casing on the Bluetooth speakers. Both divisions have the capacity to produce 2 million speakers per annum, though they are currently operating at 75% of capacity.

Assembly is required to transfer the nearly complete Bluetooth speakers to Finishing at a predetermined transfer price of $110. Assemblys standard variable cost per unit it $90, with fixed costs of $20 per unit (based on budgeted production of 1,200,000). If it was allowed by head office, Assembly currently sells its nearly complete Bluetooth speakers to outside buyers at $130 per unit.

In placing the casings on the Bluetooth speakers, Finishing incurs costs of $40 per mobile ($20 of which are fixed costs calculated on budgeted production of 1200,000 speakers). Finishing sells all manufactured Bluetooth speakers to retailers for $160 per Bluetooth speakers.

Assembly has repeatedly brought to ACT head office attention the fact that if it was allowed it would be able to increase production to 1 million units a year (i.e., to full capacity) and sell all these units at $130 each to outside buyers. Consequently, ACT head office is considering making the two divisions fully autonomous and consequently allowing the managers of the two divisions to decide on a transfer price and how many, if any, units are transferred between divisions. The manager of the finishing department is arguing against this stating this would not be in the best interests of ACT.

(c) What transfer price would you recommend if there was no outside market for the Assemblys nearly complete Bluetooth speakers and the Assembly had spare capacity? (4 Marks)

(d) Why is the manager of Finishing arguing against the proposal by ACT head office to allow the two divisions to negotiate their own transfer price? Is the manager of Finishing correct that such a proposal is not in the best interests of ACT? (7 Marks)