Question

Problem 8-6A

Comm Devices (CD) is a division of Worldwide Communications, Inc. CD produces 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 pager designed to receive signals from anywhere in the world. The Personal Communications Division has requested that CD produce 11,900 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 $48
Additional variable cost of special pager $36

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 $109 per pager. The CD Division has no available capacity. The CD Division would have to forgo sales of 9,900 pagers to existing customers in order to meet the request of the Personal Communications Division. (Round answer to 0 decimal places, e.g. 125.)

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 15,909 pagers to existing customers in order to meet the request of the Personal Communications Division. (Round answer to 0 decimal places, e.g. 125.)

Minimum transfer price $

Personal Communications Division should

accept
reject
the offer.

(c)

The Personal Communications Division has offered to pay the CD Division $104 per pager. The CD Division has available capacity.

Minimum transfer price $

Personal Communications Division should

reject
accept
the offer.

Answer 1

a. Minimum Transfer Price = $120

Profit from 9900 Units sold
Sales	9900 * $96	$    9,50,400.00
VC	9900 * $48	$    4,75,200.00
Profit		$    4,75,200.00

Minimum Transfer Price
Profit Required		$    4,75,200.00
VC	11900 * $80	$    9,52,000.00
Sales		$ 14,27,200.00
Order Size		11,900.00
Minimum Transfer Price		$             120

AS the offer price of $109 is less than the Minimum transfer price. The PC Division should reject the offer

b. Minimum Transfer Price = $144

Profit from 9900 Units sold
Sales	15909 * $96	$ 15,27,264.00
VC	15909 * $48	$    7,63,632.00
Profit		$    7,63,632.00

Minimum Transfer Price
Profit Required		$    7,63,632.00
VC	11900 * $80	$    9,52,000.00
Sales		$ 17,15,632.00
Order Size		11,900.00
Minimum Transfer Price		$                   144

as the offer price of $150 is Greater than the Minimum transfer price. The PC Division should Accept the offer

c. Minimum Transfer price = Variable cost to produce the special pager i.e., $80

as the offer price of $104 is Greater than the Minimum transfer price. The PC Division should Accept the offer