Diversified Products, Inc., has recently acquired a small publishing company that Diversified Products intends to operate as one of its investment centers. The newly acquired company has three books that it offers for salea cookbook, a travel guide, and a handy speller. Each book sells for $10.5. The publishing company's most recent monthly income statement is given below:

Requirement 2:

After seeing the income statement in the main body of the problem, management has decided to eliminate the cookbook because it is not returning a profit, and to focus all available resources on promoting the travel guide.

Based on the statement you have prepared, do you agree with the decision to eliminate the cookbook?

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	$45
Variable costs per unit	$20
Fixed costs per unit (based on capacity)	$7
Capacity in units	60,000

Sako Company has a Hi-Fi Division that could use this speaker in one of its products. The Hi-Fi Division will need 11,000 speakers per year. It has received a quote of $33 per speaker from another manufacturer. Sako Company evaluates division managers on the basis of divisional profits.

Requirement 1:

Assume that the Audio Division is now selling only 49,000 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) What is the range of transfer price the manager's of both divisions should agree? If left free to negotiate without interference, would you expect the division managers to voluntarily agree to the transfer of 11,000 speakers from the Audio Division to the Hi-Fi Division? From the standpoint of the entire company, should the transfer take place?

Requirement 2:

Assume that the Audio Division is selling all of the speakers it can produce 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 11,000 speakers from the Audio Division to the Hi-Fi Division?

From the standpoint of the entire company, should a transfer take place?

Product Line Total TravelHandy Company Cookbook Guide Speller $316,000 $ 94,800 $158,000 $ 63,200 Sales enses Printing costs Advertising General sales Salaries Equipment depreciation Sales commissions General administration Warehouse rent Depreciation-office facilities 100,000 28,900 60,200 10,900 32,600 13,800 15,900 2,900 5.600 4,500 2,100 6.952 13.300 13,300 7,050 2,820 1.400 292.460 101,758 140.230 50,472 $ 23,540 $ (6,958) $ 17,770 $ 12,728 28,000 14,000 8,900 2.100 34,760 10.428 17,380 8,400 32,600 19,200 2.100 6.300 39.900 13.300 14,100 4,230 1.400 4.200 1.400 Total expenses Net operating income (loss) The following additional information is available about the company: a. Only printing costs and sales commissions are variable; all other costs are fixed. The printing costs b. The same equipment is used to produce all three books, so the equipment depreciation cost has been (which include materials, labor, and variable overhead) are traceable to the three product lines as shown in the statement above. Sales commissions are 11% of sales for any product. allocated equally among the three product lines. An analysis of the company's activities indicates that the equipment is used 40% of the time to produce cookbooks, 40% of the time to produce travel guides, and 20% of the time to produce handy spellers c. The warehouse is used to store finished units of product, so the rental cost has been allocated to the product lines on the basis of sales dollars. The warehouse rental cost is $3 per square foot per year. The warehouse contains 56,400 square feet of space, of which 8,460 square feet is used by the cookbook line, 28,200 square feet by the travel guide line, and 19,740 square feet by the handy speller line d. The general sales cost above includes the salary of the sales manager and other sales costs not e. The general administration cost and depreciation of office facilities both relate to administration of the f. All other costs are traceable to the three product lines in the amounts shown on the statement above The management of Diversified Products, Inc., is anxious to improve the new investment center's 5% return traceable to any specific product line. This cost has been allocated to the product lines on the basis of sales dollars company as a whole. These costs have been allocated equally to the three product lines on sales