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 Division’s 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 company’s president wants to use the market price ($530) as a transfer price in intracompany transactions, what are the conclusions that you can make?

Answer rating: 100% (QA)

Solution for Option 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 ... View the full answer