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 90,000 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 $900,000 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 Required: 1. Division A wants to buy 45,000 units from Division B at $75 per unit. Should Division B accept or reject the proposal to sell the 45,000 units? (a). Calculate the net operating profit or loss to Division B and to the firm as a whole if the 45,000 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. 2. What is the range of transfer prices over which the divisional managers might negotiate a final transfer price?
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
Relevant Information about Division B
Sells 90,000 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 $900,000
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 | ||||
Required:
1. Division A wants to buy 45,000 units from Division B at $75 per unit. Should Division B accept or reject the proposal to sell the 45,000 units? (a). Calculate the net operating profit or loss to Division B and to the firm as a whole if the 45,000 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.
2. What is the range of transfer prices over which the divisional managers might negotiate a final transfer price?
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