Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

19-11. Phoenix Inc., a cellular communication company, has multiple business units, organized as divisions. Each divisions management is compensated based on the divisions operating income.

19-11. Phoenix Inc., a cellular communication company, has multiple business units, organized as divisions. Each divisions management is compensated based on the divisions 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 customersbut not to division A at this time. Division As manager approaches division Bs 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 52,500 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 $600,000 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 26,000 units from division B at $75 per unit. Determine the contribution margin for each type sale by division B. Should division B accept or reject the proposal? How would your answer differ if (a) division A requires all 26,000 units in the order to be shipped by the same supplier and what would be the net operating loss or gain to division B and the firm as a whole, or (b) division A would accept partial shipment from division B and what would be the benefit from this alternative to division B?

1A.

image text in transcribed

1B.

image text in transcribed

1C.

image text in transcribed

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

Outside To Division A Selling Price Less: Variable costs per unit Less: Variable marketing costs Contribution Margin Should division B accept or reject the proposal? Division A requires all 26,000 units Net operating profit/loss to Division B: Total Contribution Forgone contribution of not selling to outside consumers Net operating loss to division B | $ 0 Net operating profit/loss to the firm as a whole: Savings to the firm if Division A buys all 26,000 units Opportunity cost of loss sales Net loss to the firm SO Outside To Division A Selling Price Less: Variable costs per unit Less: Variable marketing costs Contribution Margin Should division B accept or reject the proposal? Division A requires all 26,000 units Net operating profit/loss to Division B: Total Contribution Forgone contribution of not selling to outside consumers Net operating loss to division B | $ 0 Net operating profit/loss to the firm as a whole: Savings to the firm if Division A buys all 26,000 units Opportunity cost of loss sales Net loss to the firm SO

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Financial Accounting

Authors: Belverd E. Needles Jr,, Marian Powers

8th Edition

0618310746, 978-0618310746

More Books

Students also viewed these Accounting questions

Question

Explain in detail the different methods of performance appraisal .

Answered: 1 week ago