Question

Question 3 Spirit Manufacturing is a division of Birch Communications, Inc. Spirit 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 Spirit 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 Spirit division: Selling price of regular cell phone $100 Variable cost of regular cell phone 50 Additional variable cost of special cell phone 35 Calculate the minimum transfer price and indicate whether the internal transfer should occur for each of the three scenarios:

a. The marketing vice president offers to pay Spirit $110 per phone. Spirit has available capacity. Calculate the minimum transfer price: Minimum transfer price $_____Indicate whether the internal transfer should occur for the above situation. The offer should be ____.

b. The marketing vice president offers to pay Spirit $110 per phone. Spirit has no available capacity and would have to forgo sales of 20,000 phones to existing customers to meet this request. Calculate the minimum transfer price: Minimum transfer price $___ Indicate whether the internal transfer should occur for the above situation. The offer should be ___.

c. The marketing vice president offers to pay Spirit $175 per phone. Spirit has no available capacity and would have to forgo sales of 30,000 phones to existing customers to meet this request. Calculate the minimum transfer price. Minimum transfer price $____. Indicate whether the internal transfer should occur for the above situation. The offer should be____ .

Please show your work so I am able to study this! Thanks!

Answer 1

At normal prices, contribution per phone is USD 50 (100-50)

If Spirit has spare capacity, then the minimum transfer price should be the incremental (variable costs), i.e. 50 Variable costs plus 35 as additional variable costs, i.e. USD 85 (minimum transfer price). The offer should be accepted.

If Spirit does not have spare capacity, then the minimum price will be the price charged to external customer, plus incremental costs for special phones. In this case, the amount will be USD 100 (price at which phones are sold to external parties) plus USD 35, i.e. additional variable costs. Therefore, the minimum price in this case should be USD 135. The offer should not be accepted

Please comment for any clarifications