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 9,900 units of this special pager. The following facts are available regarding the Comm Devices Division.

Selling price of standard pager		$100
Variable cost of standard pager		$49
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 $112 per pager. The CD Division has no available capacity. The CD Division would have to forgo sales of 7,920 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                                                          rejectaccept 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 13,200 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                                                          acceptreject the offer.

(c)

The Personal Communications Division has offered to pay the CD Division $107 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                                                          rejectaccept the offer.

Answer 1

(a) Minimum transfer price if sale of 7,920 pagers to the existing customers has to be foregone

= (Contribution lost due to sales foregone + Variable cost of special pager) / Total number of special pagers to be transferred

= ($403,920 + $861,300) / 9,900 pagers

= $127.80 per pager

Hence, Personal Communications division should reject the offer.

* Contribution lost due to sales foregone = 7,920 pagers x ($100 - $49 per pager)

= $403,920

** Variable cost of special pagers = $49 + $38 = $87 per pager

= $87 per pager x 9,900 pagers = $861,300

(b) Minimum transfer price if sale of 13,200 pagers to the existing customers has to be foregone

= (Contribution lost due to sales foregone + Variable cost of special pager) / Total number of special pagers to be transferred

= ($673,200 + $861,300) / 9,900 pagers

= $155 per pager

Hence, Personal Communications division should reject the offer.

* Contribution lost due to sales foregone = 13,200 pagers x ($100 - $49 per pager)

= $673,200

** Variable cost of special pagers = $49 + $38 = $87 per pager

= $87 per pager x 9,900 pagers = $861,300

(c) Minimum transfer price if CD Division has available capacity

= Variable cost per pager

= $49 + $38 per pager = $87 per pager

Hence, Personal Communications division should accept the offer.