Sony manufactures and sells television sets. Its assembly division (AD) buys television screens from the screen division (SD) and assembles the TV sets. The SD, which is operating at capacity, incurs an incremental manufacturing cost of $60 per screen. The SD can sell all its output to the outside market at a price of $110 per screen, after incurring a variable marketing and distribution cost of $10 per screen. If the AD purchases screens from outside suppliers at a price of $110 per screen, it will incur a variable purchasing cost of $8 per screen. Sony’s division managers can act autonomously to maximize their own division’s operating income. Required: What is the minimum transfer price at which the SD manager would be willing to sell screens to the AD? What is the maximum transfer price at which the AD manager would be willing to purchase screens from the SD? Now suppose that the SD can sell only 80% of its output capacity of 10,000 screens per month on the open market. Capacity cannot be reduced in the short run. The AD can assemble and sell more than 10,000 TV sets per month. What is the minimum transfer price at which the SD manager would be willing to sell screens to the AD? From the point of view of Sony’s management, how much of the SD output should be transferred to the AD? If Sony mandates the SD and AD managers to “split the difference” on the minimum and maximum transfer prices they would be willing to negotiate over, what would be the resulting transfer price? Does this price achieve the outcome desired in requirement 3b?

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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Sony manufactures and sells television sets. Its assembly division (AD) buys television screens from the screen division (SD) and assembles the TV sets. The SD, which is operating at capacity, incurs an incremental manufacturing cost of $60 per screen. The SD can sell all its output to the outside market at a price of $110 per screen, after incurring a variable marketing and distribution cost of $10 per screen. If the AD purchases screens from outside suppliers at a price of $110 per screen, it will incur a variable purchasing cost of $8 per screen. Sony’s division managers can act autonomously to maximize their own division’s operating income.

Required:

What is the minimum transfer price at which the SD manager would be willing to sell screens to the AD?
What is the maximum transfer price at which the AD manager would be willing to purchase screens from the SD?
Now suppose that the SD can sell only 80% of its output capacity of 10,000 screens per month on the open market. Capacity cannot be reduced in the short run. The AD can assemble and sell more than 10,000 TV sets per month.
1. What is the minimum transfer price at which the SD manager would be willing to sell screens to the AD?
2. From the point of view of Sony’s management, how much of the SD output should be transferred to the AD?
3. If Sony mandates the SD and AD managers to “split the difference” on the minimum and maximum transfer prices they would be willing to negotiate over, what would be the resulting transfer price? Does this price achieve the outcome desired in requirement 3b?

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