Allcell Manufacturing is a division of Birch Communications, Inc. All cell produ

Question

Allcell Manufacturing is a division of Birch Communications, Inc. All cell produces cell phones and sells these phones to other communication companies, as well as to Birch. Recently, the vice president of marketing for Birch approached Allcell with a request to make 20,000 units of a special cell phone that could be used anywhere in the world. The following information is available regarding the Allcell division: Selling price of regular cell phone . . . . . . . . . . $80 Variable cost of regular cell phone. . . . . . . . . . . 45 Additional variable cost of special cell phone. . . . 30 Calculate the minimum transfer price and indicate whether the internal transfer should occur for each of the following: Show your calculations to receive credit for your answers. The marketing vice president offers to pay Allcell $95 per phone. Allcell has available capacity. The marketing vice president offers to pay Allcell $95 per phone. Allcell has no available capacity and would have to forego sales of 20,000 phones to existing customers to meet this request.

Explanation / Answer

Hi,

Please find the answer as follows:

Case 1: Allcell has available capacity

Since capacity is available, the main objective would be to recover the total variable cost of manufacturing special phones

Therefore, transfer price would be: 45 (Cost of Regular Cell Phone) + 30 (Cost of Special Cell Phone) = $75 per phone

Case 2: Allcell has no available capacity

In this case, minimum transfer price would be equal to the selling price of the regular phone as production of special phones would result in decline in sales of 20000 phones to existing customers.

Minimum transfer price = $80 per phone

Thanks.

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