Chapter 11A, Problem 11A.1E

1.

To determine

Compute lowest and highest acceptable transfer price, range of acceptable transfer prices, and should company transfer carried out or reject if company sells 20,000 speakers.

Introduction: Transfer prices means the price charged on the product or service provided by on department of the company to another department of the company. Divisions are evaluated on the profit basis, or residual income price must be fixed for the transfer. Prices charged in these situations are referred as transfer prices.

Answer to Problem 11A.1E

Lowest acceptable transfer price is $42 and highest acceptable transfer price is $57.

Explanation of Solution

1. Transfer price for lowest acceptable price.

  $\begin{array}{l}Transferprice\ge Variable\cos tperunit+\frac{Totalcontributionm\arg inonlostsales}{Numberofunitstransferred}\\ Transferprice\ge \$42+\frac{\$0}{\$5,000}\\ Transferprice\ge \$42\end{array}$

2. Transfer price for highest acceptable price:

If company can buy the speakers from outside supplier for $57 then the transfer price for highest acceptable price will be $57. So it is acceptable for the company to pay the price that is the market price.

  $Transferprice\le Costofbuyingfromoutside\sup plier=\$57$

3. By combining the requirements of selling division and buying division the acceptable transfer price will be $42 if 5,000 speakers are sold. Managers understand their own businesses so they will be ready to accept this transfer price.
4. If seen from the standpoint of the company the transfer should take place. By combining the requirements of selling division and buying division the acceptable transfer price will be $42 if 5,000 speakers are sold. Company sold speakers for $42 than selling them at $57 that is the market price.

2.

To determine

Compute lowest and highest acceptable transfer price, range of acceptable transfer prices, and should company transfer carried out or reject if company sells all speakers.

Introduction: Transfer prices means the price charged on the product or service provided by on department of the company to another department of the company. Divisions are evaluated on the profit basis, or residual income price must be fixed for the transfer. Prices charged in these situations are referred as transfer prices.

Answer to Problem 11A.1E

Lowest acceptable transfer price is $60 and highest acceptable transfer price is $57.

Explanation of Solution

1. Transfer price for lowest acceptable price.

  $\begin{array}{l}Transferprice\ge Variable\cos tperunit+\frac{Totalcontributionm\arg inonlostsales}{Numberofunitstransferred}\\ Transferprice\ge \$42+\frac{\left(\$60-\$42\right)\times \$5,000}{\$5,000}\\ Transferprice\ge \$60\end{array}$

2. Transfer price for highest acceptable price:

Company will not be ready to pay more than $57 per speaker as it will be costly for the company for buy it.

3. By combining the requirements of selling division and buying division in the acceptable transfer price, selling division should have $60 and buying division should not pay more than $57. The agreement made that transfer the speakers is not good to carry out.
4. The standpoint of the company, company should not carry on the transfer. By combining the requirements of selling division and buying division in the acceptable transfer price, selling division should have $60 and buying division should not pay more than $57. Here company saves $3 by giving up revenues of $60 and saving the $57.