Question

Part 1-

The Heating Division of Swifty International produces a heating element that it sells to its customers for $45 per unit. Its variable cost per unit is $22, and its fixed cost per unit is $11. Top management of Swifty International would like the Heating Division to transfer 15,200 heating units to another division within the company at a price of $34. Assume that the Heating Division has sufficient excess capacity to provide the 15,200 heating units to the other division. What is the minimum transfer price that the Heating Division should accept?

What is the minimum transfer price?

Part 2- Comm Devices (CD) is a division of Waterway Communications, Inc. CD produces restaurant pagers and other personal communication devices. These devices are sold to other Waterway 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 $91 Variable cost of standard pager $52 Additional variable cost of special pager $35 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 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.) What is the minimum transfer price?

Personal Communications Division should select between reject and accept

the offer. Accept or reject?

(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.)

What is the minimum transfer price?

Personal Communications Division should select between accept and reject

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 assuming that the CD Division has available capacity

Should the offer be accepted or rejected?

Answer 1

Before Answering the Question,we must analyse the General rule behind Transfer pricing-

The basic rule is to

"Transfer at variable cost only" If the division has unused capacity then such division should transfer the product at variable cost only.

"Transfer Based on Market Price" if the division has adequate market demand then transfrer price must be market price o outsiders.

"Transfer Price based on Negotiation" If the product has no external demand and the market price cannot be ascertained then the division should transfer product at Negotiation price only.

Answer-

Part-1In the given case excess capacity of product exist hence the minimum transfer price must be $22 i.e variable cost.

Part-2