Question

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 12,000 units of this special pager. The following facts are available regarding the Comm Devices Division.

Selling price of standard pager	$95
Variable cost of standard pager	$50
Additional variable cost of special pager	$30

Instructions

For each of the following independent situations, calculate the minimum transfer price, and discuss whether the internal transfer should take place or whether the Personal Communications Division should purchase the pager externally.

(a) The Personal Communications Division has offered to pay the CD Division $105 per pager. The CD Division has no available capacity. The CD Division would have to forgo sales of 10,000 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.)

(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 10,000 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 price $140

(c) The Personal Communications Division has offered to pay the CD Division $100 per pager. The CD Division has available capacity.

Answer 1

a. Personal Communications Division should purchase externally as the offer price is $105 per pager which is less than minimum transfer price

Profit from 10000 Units sold
Sales	10000 * $95	$    9,50,000.00
VC	10000 * $50	$    5,00,000.00
Profit		$    4,50,000.00

Minimum Transfer Price
Profit Required		$    4,50,000.00
VC	12000 * $80	$    9,60,000.00
Sales		$ 14,10,000.00
Order Size		12,000.00
Minimum Transfer Price		$             117.50

Minimum Transfer Price = $117.50

b. Personal Communications Division should purchase the pagers internaly as they are able to pay a price which ishigher than minimum transfer price

Profit from 10000 Units sold
Sales	10000 * $95	$    9,50,000.00
VC	10000 * $50	$    5,00,000.00
Profit		$    4,50,000.00

Minimum Transfer Price
Profit Required		$    4,50,000.00
VC	12000 * $80	$    9,60,000.00
Sales		$ 14,10,000.00
Order Size		12,000.00
Minimum Transfer Price		$             117.50

Minimum Transfer price = $117.50

c. Accept the offer as the offer price is higher than the Minimum transfer price

as the company has free capacity the minimum transfer price will be equal to Variable cost of the special pager i.e, $80

Minimum TP is $80