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 11,700 units of this special pager. The following facts are available regarding the Comm Devices Division. Selling price of standard pager $97 Variable cost of standard pager $49 Additional variable cost of special pager $39 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 $106 per pager. The CD Division has no available capacity. The CD Division would have to forgo sales of 9,360 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 $ the offer. Personal Communications Division should (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 15,600 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 $ Personal Communications Division should the offer (c) The Personal Communications Division has offered to pay the CD Division $101 per pager. The CD Division has available capacity. Minimum transfer price $ Personal Communications Division should the offer

Answer 1

Minimum transfer Price will be equal to the variable cost incurred + contribution margin lost

= (49+39)*11,700 + (97-49)*9,360

= $1,478,880

i.e. $126.4 per pager

REJECT

b.Minimum Transfer Price = (49+39)*11,700 + (97-49)*15,600

= $1,778,400

Per pager = $152

REJECT

c.Minimum Transfer Price in case of excess capacity = Variable cost per pager

= $49+39

= $88 per pager

ACCEPT