Question
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.
1B.
1C.
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 SOStep by Step Solution
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