Exercise $11-3($Algo$)$ Transfer Pricing Basics $[$LO$11-3]$

Sako Company's Audio Division produces a speaker used by manufacturers of various audio products. Sales and cost data on the

speaker follow:

Sako Company has 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 $$125$ per speaker from another manufacturer. Sako Company evaluates division managers on the basis

of divisional profits.

Required:

Assume the Audio Division sells only $20,000$ 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$.$ What is the range of acceptable transfer prices $($if any$)$ between the two divisions? 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?

d$.$ From the standpoint of the entire company, should the transfer take place?

Assume the Audio Division is selling $22,500$ 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$.$ What is the range of acceptable transfer prices $($if any$)$ between the two divisions? 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?

d$.$ From the standpoint of the entire company, should the transfer take place?

Assume the Audio Division is selling $25,000$ 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$.$ What is the range of acceptable transfer prices $($if any$)$ between the two divisions? If left free to negotiate without interfarence,

would you expect the division managers to voluntarily agree to the transfer of $5,000$ speakers from the Audio Division$]$ o the $Hi-$

Fi Division?

d$.$ From the standpoint of the entire company, should the transfer take place?

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