Question

Comm Devices (CD) is a division of Worldwide Communications, Inc. CD produces restaurant pagers and other personal communication devices. These devices are sold to other Worldwide divisions, as well as to other communication companies. CD was recently approached by the manager of the Personal Communications Division regarding a request to make a special emergency-response pager designed to receive signals from anywhere in the world. The Personal Communications Division has requested that CD produce 10,800 units of this special pager. The following facts are available regarding the Comm Devices Division.

Selling price of standard pager		$96
Variable cost of standard pager		$54
Additional variable cost of special pager		$32

For each of the following independent situations, calculate the minimum transfer price, and determine whether the Personal Communications Division should accept or reject the offer.

(a)

The Personal Communications Division has offered to pay the CD Division $113 per pager. The CD Division has no available capacity. The CD Division would have to forgo sales of 8,640 pagers to existing customers in order to meet the request of the Personal Communications Division. (Note: The number of special pagers to be produced does not equal the number of existing pagers that would be forgone.) (Round answer to 2 decimal places, e.g. 125.36.)

Minimum transfer price

$enter the minimum transfer price in dollars rounded to 2 decimal places

Personal Communications Division should select an option

the offer.

(b)

The Personal Communications Division has offered to pay the CD Division $150 per pager. The CD Division has no available capacity. The CD Division would have to forgo sales of 14,400 pagers to existing customers in order to meet the request of the Personal Communications Division. (Note: The number of special pagers to be produced does not equal the number of existing pagers that would be forgone.)

Minimum transfer price

$enter the minimum transfer price in dollars

Personal Communications Division should select an option

the offer.

(c)

The Personal Communications Division has offered to pay the CD Division $108 per pager. The CD Division has available capacity.

Minimum transfer price

$enter the minimum transfer price in dollars

Personal Communications Division should select an option

the offer.

Answer 1

Personal communication

a)Minimum transfer price = Cost to be incurred + Benefit lost

= 10,800*(54+32)+8640*(96-54)

= $1,291,680

i.e. $119.60 per pager

Should reject since higher than offer

b. Minimum transfer price = Cost to be incurred + Benefit lost

= 10,800*(54+32)+14400*(96-54)

= $1,533,600

i.e. $142 per pager

should accept

C. In case of available capacity, minimum transfer price = cost incurred per unit

= 54+32

= $86 per pager

ACCEPT