Four Season Ltd. has two divisions, including a Speaker Division and a Hi-Fi Division. The Hi-Fi Division purchases speakers for its Hi-Fi Audio Systems every year. Currently, it purchases 1,000 speakers from an outside supplier for $430 each. The manager of the Speaker Division has approached the manager of the Hi-Fi Division about selling speakers to the Hi-Fi Division.

The Speaker Divisions sales and cost data per speaker are as follows: Selling price per unit $530 Variable costs per unit* $350 Fixed costs per unit (based on a capacity of 4,000 units per annum) $100 *Note: Includes $25 per unit in sales commission, which can be avoided on intracompany sales. Required:

(a) Assume that Speaker Division is producing at 60% of its capacity and can sell all that it produces to outside customers. If the managers are free to negotiate and make decisions on their own, will a transfer take place? If so, within what range will the transfer price fall? Explain.

(b) Assume that Speaker Division is producing at 90% of its capacity and can sell all that it produces to outside customers. (i) If the managers are free to negotiate and make decisions on their own, will a transfer take place? If so, within what range will the transfer price fall? Explain. (ii) Due to inflexible management policies, the Hi-Fi Division is required to purchase all speakers from Speaker Division at $480 per unit. What will be the effect on the profit of the company as a whole?

(c) If the companys president wants to use the market price ($530) as a transfer price in intracompany transactions, what are the conclusions that you can make?