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

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 $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. (Round answer to 0 decimal places, e.g. 125.)

Minimum transfer price = ?

(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 16,000 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 = ?

(c)

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

Minimum transfer price

= ?

Answer 1

(a) CD Division has no available capacity (Forgo sales of 10000 pagers) :-

           Minimum Transfer Price:-

Particulars	Amount in $
Variable cost of Standard Pager	50
Additional variable cost of special pager	30
Contribution lost for one special pager (WN 1)	37.5
Minimum Transfer Price	117.5

Personal communication Division offer to pay $ 105 per special pager which will not acceptable by CD

Working Note 1:-Contribution lost per special pager :-

   Contribution lost of standard pager = 10000 * (95-50) =450000

      Contribution lost for one special pager = 450000/12000 units= 37.5

(b) CD Division has no available capacity (Forgo sales of 16000 pagers)

           Minimum Transfer Price:-

Particulars	Amount in $
Variable cost of Standard Pager	50
Additional variable cost of special pager	30
Contribution lost for one special pager (WN 1)	60
Minimum Transfer Price	140

Personal communication Division offer to pay $ 150 per special pager which will acceptable by CD

Working Note 1:-Contribution lost per special pager :-

   Contribution lost of standard pager = 16000 * (95-50) =720000

      Contribution lost for one special pager = 720000/12000 units= 60

(c) CD Division has available capacity :-

           Minimum Transfer Price:-

Particulars	Amount in $
Variable cost of Standard Pager	50
Additional variable cost of special pager	30
Minimum Transfer Price	80

Personal communication Division offer to pay $ 100 per special pager which will acceptable by CD