19-51 Transfer Pricing: Decision Making Phoenix Inc., a cellular communication company, has mul- tiple 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 divi- sion B. If it produces the cellular equipment that division A desires, division B would incur variable manufacturing costs of $60 per unit Relevant Information about Division B Sells 50,000 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 $580,000 Income per Unit for Division A (assuming parts purchased externally, not internally from division B) Sales revenue Manufacturing costs: Cellular equipment Other materials $320 80 10 40 Fixed costs Total manufacturing costs Gross margin Marketing costs: Variable 130 190 35 15 Fixed Total marketing costs Operating income per unit 50 $140 Required 1. Division A wants to buy all 25,000 units from division B at $75 per unit. Should division B accept or reject the proposal? How would your answer differ if (a) Division A requires all 25,000 units in the order to be shipped by the same supplier, or (b) Division A would accept partial shipment from division B? 2. What is the range of transfer prices over which the divisional managers might negotiate a final transfer price? Provide a rationale for the range you provide