Reference no: EM132567144

Phoenix Inc., a cellular communication company, has multiple business units, organized as divisions. Each division's management is compensated based on the division's operating income. Division A currently purchases cellular equipment from outside markets and uses it to produce communication systems. Division B produces similar cellular equipment that it sells to outside customers-but not to division A at this time. Division A's manager approaches division B's manager with a proposal to buy the equipment from division B. If it produces the cellular equipment that division A desires, division B will incur variable manufacturing costs of $60 per unit.

Relevant Information about Division B

Sells 75,000 units of equipment to outside customers at $130 per unit

Operating capacity is currently 80%; the division can operate at 100%

Variable manufacturing costs are $70 per unit

Variable marketing costs are $8 per unit

Fixed manufacturing costs are $780,000

Income per Unit for Division A (assuming parts purchased externally, not internally from division B)

Sales revenue $ 320

Manufacturing costs:

Cellular equipment 80

Other materials 10

Fixed costs 40

Total manufacturing costs 130

Gross margin 190

Marketing costs:

Variable 35

Fixed 15

Total marketing costs 50

Operating income per unit $ 140

Please answer the following questions:

Question 1. Division A wants to buy 37,500 units from Division B at $75 per unit. Should Division B accept or reject the proposal to sell the 37,500 units?

(a). Calculate the net operating profit or loss to Division B and to the firm as a whole if the 37,500 units are sold to Division A.

(b.) Calculate the net benefit to the firm as a whole if Division A will accept a partial shipment from Division B.

Question 2. What is the range of transfer prices over which the divisional managers might negotiate a final transfer price?