Next Level (NL) is a division of Global Electronics, Inc. NL produces videogame systems. These systems are sold to retailers. NL recently approached the manager of the personal computer (PC) division regarding a request to buy a special circuit board for a new advanced video game system. NL has requested that the personal computer division pro- duce 200,000 units of this special circuit board. The following facts are available regarding the personal computer division:
Selling price of standard circuit board..................$54
Variable cost of standard circuit board..................30
Additional variable costs of special circuit board......20
Instructions
For each of the following independent situations, calculate the minimum transfer price, and discuss whether the internal transfer should take place or whether Next Level should purchase the circuit board externally.
(a) Next Level has offered to pay the PC division $62 per circuit board. The PC division has no available capacity. The PC division would have to forgo sales of 200,000 circuit boards to existing customers in order to meet the request of Next Level.
(b) Next level has offered to pay the PC division $90 per circuit board. The PC division has no available capacity. The PC division would have to forgo sales of 250,000 circuit boards to existing customers in order to meet the request of Next Level.
(c) Next Level has offered to pay the PC division $62 per circuit board. The PC division has available capacity.