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

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

the speaker follow:

Selling price per unit on the intermediate market $$88$

Variable costs per unit $$70$

Fixed costs per unit $($based on capacity$)$ $$8$

Capacity in units $25,000$

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 recelved a quote of $$85$ per speaker from another manufacturer. Sako Company evaluates division managers on the basis

of divisional profits.

Requlred:

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 negotlate 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 entlre 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 negotlate without Interference, would

you expect the division managers to voluntarlly agree to the transfer of $5,000$ speakers from the Audio DIvision to the HI$-$FI DIVIslon?

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 negotlate 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 entlre company, should the transfer take place?

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