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:
1. The marketing vice president offers to pay Allcell $95 per phone. Allcell has available capacity.
2. 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.
This solution helps go through accounting concepts such as minimum transfer price and internal transfers.