Problem
Celkon Ltd is a large electronics company with multiple divisions. The Circuit division manufactures circuit boards, which it can sell externally or transfer internally to the Phone division. The Phone division assembles cellular phones and sells them to external customers. Both divisions are evaluated as profit centers. The selling price of a cellular phone is $420, and the external market price for the circuit board is $130. The variable production cost for the Phone division to complete a phone (not including the cost of the circuit board) is $295. The variable production cost of the circuit board is $87. The Circuit division is currently manufacturing and selling 10,000 circuit boards externally per month while the Phone division is currently selling 3,000 phones per month.
Task
A. Assume that the Circuit division has the capacity to manufacture 15,000 boards. Calculate the transfer price using the general rule.
B. Assume that the Circuit division has the capacity to manufacture 10,000 boards. Calculate the transfer price using the general rule.
C. Assume that the Circuit division has the capacity to manufacture 12,000 boards. Calculate the transfer price using the general rule.
D. Assume that the company has the policy of transferring all internal products at market prices. Will the Phone division purchase the circuit boards from the circuit board division?
E. Assume that the Circuit division has the capacity to manufacture 15,000 boards, and the Phone division receives a special order for 1,000 phones at a discounted price of $390. From the viewpoint of Celkon Ltd, should this special order be accepted and why? If it is accepted, what transfer price should be set?