Panada Manufacturing (PM) is a division of Worldwide Communications, Inc. PM produces pagers and other personal communication devices. These devices are sold to other Worldwide divisions, as well as to other communication companies. PM 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 PM produce 10,000 units of this special pager. The following facts are available regarding the Panda Manufacturing Division:
Selling price of standard pager 95
Variable cost of standard pager 50
Additional variable cost of special pager 35
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. Show your work.
(a) The Personal Communications Division has offered to pay the PM Division $105 per pager. The PM Division has no available capacity. The PM Division would have to forego sales of 10,000 pagers to existing customers in order to meet the request of the Personal Communications Division.
(b) The Personal Communications Division has offered to pay the PM Division $160 per pager. The PM Division has no available capacity. The PM Division would have to forego sales of 14,000 pagers to existing customers in order to meet the request of the Personal Communications Division.
(c) The Personal Communications Division has offered to pay the PM Division $105 per pager. The PM Division has available capacity.