Revco Electronics is a division of International Motors, an automobile manufacturer. Revco produces car radio/CD players. Revco sells its products to International Motors, as well as to other car manufacturers and electronics distributors. The following information is available regarding Revco’s car radio/CD player.

Instructions 

Determine whether the goods should be transferred internally or purchased externally and what the appropriate transfer price should be under each of the following independent situations.

(a) Revco Electronics is operating at full capacity. There is a saving of $4 per unit for variable cost if the car radio is made for internal sale. International Motors can purchase a comparable car radio from an outside supplier for $47.

(b) Revco Electronics has sufficient existing capacity to meet the needs of International Motors. International Motors can purchase a comparable car radio from an outside supplier for $47.

(c) International Motors wants to purchase a special-order car radio/CD player with additional features. It needs 15,000 units. Revco Electronics has determined that the additional variable cost would be $12 per unit. Revco Electronics has no spare capacity. It will have to forgo sales of 15,000 units to external parties in order to provide this special order.

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Selling price of car radio/CD player to external customers Variable cost per unit Capacity $49 $28 200,000 units