Question

In: Accounting

Comm Devices (CD) is a division of Worldwide Communications, Inc. CD produces restaurant pagers and other...

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 $96
Variable cost of standard pager $54
Additional variable cost of special pager $38


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 $115 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.)

Minimum transfer price
Personal Communications Division should (accept/reject) 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 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 (accept/reject) the offer.

c. The Personal Communications Division has offered to pay the CD Division $110 per pager. The CD Division has available capacity.

Minimum transfer price
Personal Communications Division should (accept/reject) the offer.

Solutions

Expert Solution

SOLUTION:

A)CALCULATION OF MINIMUM TRANSFER PRICE:

PARTICULARS AMOUNT($)
A)LOSS OF REGULAR SALES(UNITS)

9360

B)CONTRIBUTION MARGIN PER UNIT(96-54) 42
C)TOTAL LOSS OF CONTRIBUTION MARGIN(A*B) 393120
D)UNITS OF SPECIAL PAGER 11700
E)LOSS OF CONTRIBUTION MARGIN PER UNIT OF SPECIAL PAGER(C/D) 33.6
F)VARIABLE COST TO STANDARD PAGER 54
G)ADDITIONAL VARIABLE COST OF SPECIAL PAGER 38
H)MINIMUM TRANSFER PRICE 125.6

PERSONAL COMMUNICATION DIVISION SHOULD REJECT THE OFFER BECAUSE THE MINIMUM TRANSFER PRICE IS MORE THAN THE PRICE OFFERED.

B)CALCULATION OF MINIMUM TRANSFER PRICE:

PARTICULARS AMOUNT($)
A)LOSS OF REGULAR SALES(UNITS) 15600
B)CONTRIBUTION MARGIN PER UNIT(96-54) 42
C)TOTAL LOSS OF CONTRIBUTION MARGIN(A*B) 655200
D)UNITS OF SPECIAL PAGER 11700
E)LOSS OF CONTRIBUTION MARGIN PER UNIT OF SPECIAL PAGER(C/D) 56
F)VARIABLE COST TO STANDARD PAGER 54
G)ADDITIONAL VARIABLE COST OF SPECIAL PAGER 38
H)MINIMUM TRANSFER PRICE 148

PERSONAL COMMUNICATION DIVISION SHOULD ACCEPTTHE OFFER BECAUSE THE MINIMUM TRANSFER PRICE IS LESS THAN THE PRICE OFFERED.

C)MINIMUM TRANSFER PRICE=VARIABLE COST OF STANDARD PAGER+ADDITIONAL VARIABLE COST OF SPECIAL PAGER

=54+38

=$92

PERSONAL COMMUNICATION DIVISION SHOULD ACCEPTTHE OFFER BECAUSE THE MINIMUM TRANSFER PRICE IS LESS THAN THE PRICE OFFERED.

KINDLY UPVOTE AND THANKS IN ADVANCE


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