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ACC5200/Chapter 15: Transfer Pricing Homework Problems Transfer Pricing Basics 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 $50

ACC5200/Chapter 15: Transfer Pricing Homework Problems Transfer Pricing Basics 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 $50

FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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### ACC5200/Chapter 15: Transfer Pricing ## Homework Problems ### Transfer Pricing Basics Sako Company’s Audio Division produces a speaker that is used by manufacturers of various audio products. Sales and cost data on the speaker are as follows: - **Selling price per unit on the intermediate market:** $50 - **Variable costs per unit:** $20 - **Fixed costs per unit (based on capacity):** $8 - **Capacity in units:** 65,000 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 $30 per speaker from another manufacturer. Sako Company evaluates division managers on the basis of divisional profits. ### Required: 1. **Assume that the Audio Division is now selling 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. 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? Why or why not?** - **d. From the standpoint of the entire company, should the transfer take place? Why or why not?** 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?** This section includes a detailed breakdown of the costs, market prices, and inter-division transfer pricing considerations for the Sako Company. The calculations will help students to understand the principles of transfer pricing within a company with multiple divisions, and how to balance divisional performance with overall company profitability.
Transcribed Image Text:### ACC5200/Chapter 15: Transfer Pricing ## Homework Problems ### Transfer Pricing Basics Sako Company’s Audio Division produces a speaker that is used by manufacturers of various audio products. Sales and cost data on the speaker are as follows: - **Selling price per unit on the intermediate market:** $50 - **Variable costs per unit:** $20 - **Fixed costs per unit (based on capacity):** $8 - **Capacity in units:** 65,000 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 $30 per speaker from another manufacturer. Sako Company evaluates division managers on the basis of divisional profits. ### Required: 1. **Assume that the Audio Division is now selling 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. 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? Why or why not?** - **d. From the standpoint of the entire company, should the transfer take place? Why or why not?** 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?** This section includes a detailed breakdown of the costs, market prices, and inter-division transfer pricing considerations for the Sako Company. The calculations will help students to understand the principles of transfer pricing within a company with multiple divisions, and how to balance divisional performance with overall company profitability.
**Discussion Questions: Intra-Company Transfers and Managerial Decisions** **c. 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? Why or why not?** **d. From the standpoint of the entire company, should the transfer take place? Why or why not?** --- **Detailed Analysis:** **Question C:** - The likelihood of division managers voluntarily agreeing to the transfer of 5,000 speakers would hinge on the internal pricing strategy, the perceived benefits to each division, and overall company policies regarding internal sales. - Considerations: - **Audio Division:** Would need to evaluate if the proposed transfer pricing covers their production costs and expected profit margins. Additionally, they would consider if there is an opportunity cost i.e., could those 5,000 speakers be sold externally at a higher profit. - **Hi-Fi Division:** Would assess if procuring speakers from the Audio Division is more cost-effective compared to external suppliers, along with the benefits of having consistent quality and integration within company operations. **Question D:** - From a broader, company-wide perspective, the decision should focus on overall profitability and strategic goals. - The transfer might be advantageous if it leads to lower costs through internal efficiencies, better inventory management, and enhanced integration of product components. - Negative impacts might include internal conflicts over transfer pricing and possible inefficiencies if one division feels disadvantaged by the pricing agreement. **Conclusion:** - Ultimately, the company's senior management should weigh the potential benefits of improved coordination and lower costs against the risks of intra-company disputes and the need to maintain robust divisional performance incentives.
Transcribed Image Text:**Discussion Questions: Intra-Company Transfers and Managerial Decisions** **c. 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? Why or why not?** **d. From the standpoint of the entire company, should the transfer take place? Why or why not?** --- **Detailed Analysis:** **Question C:** - The likelihood of division managers voluntarily agreeing to the transfer of 5,000 speakers would hinge on the internal pricing strategy, the perceived benefits to each division, and overall company policies regarding internal sales. - Considerations: - **Audio Division:** Would need to evaluate if the proposed transfer pricing covers their production costs and expected profit margins. Additionally, they would consider if there is an opportunity cost i.e., could those 5,000 speakers be sold externally at a higher profit. - **Hi-Fi Division:** Would assess if procuring speakers from the Audio Division is more cost-effective compared to external suppliers, along with the benefits of having consistent quality and integration within company operations. **Question D:** - From a broader, company-wide perspective, the decision should focus on overall profitability and strategic goals. - The transfer might be advantageous if it leads to lower costs through internal efficiencies, better inventory management, and enhanced integration of product components. - Negative impacts might include internal conflicts over transfer pricing and possible inefficiencies if one division feels disadvantaged by the pricing agreement. **Conclusion:** - Ultimately, the company's senior management should weigh the potential benefits of improved coordination and lower costs against the risks of intra-company disputes and the need to maintain robust divisional performance incentives.
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