Problem 86A Comm Devices CD is a division of Worldwide Commu

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 10,000 units of this special pager. The following facts are available regarding the Comm Devices Division.

Selling price of standard pager $98
Variable cost of standard pager $49
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 $112 per pager. The CD Division has no available capacity. The CD Division would have to forgo sales of 8,000 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 $

Personal Communications Division should

reject
accept
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 14,006 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

reject
accept
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 $

Personal Communications Division should

accept
reject
the offer.

Solution

a. Reject the offer as the offer price is $112 per pager which is less than minimum transfer price

Minimum Transfer Price = $124.20

b. Reject the offer as it is less than Minimum Transfer price

Minimum Transfer price = $153.63

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 Variabl cost of the special pager i.e, $85

Minimum TP is $85