Can someone help me with this question Req 1C?

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 80,000 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 $820,000

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 37,000 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 37,000 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?

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

Complete this question by entering your answers in the tabs below.

• Req 1A
• Req 1B
• Req 1C
• Req 2

Division A wants to buy 37,000 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?

	To Division A	Outside
Selling Price	$75	$130
Less: Variable costs per unit	60	70
Less: Variable marketing costs	0	8
Contribution Margin	$15	$52
Should division B accept or reject the proposal?		Reject

How would your answer differ if division A requires all 37,000 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?

Division A requires all 37,000 units
Net operating profit/loss to Division B:
Total Contribution	$555,000
Forgone contribution of not selling to outside consumers	884,000
Net operating loss to division B	$(329,000)
Net operating profit/loss to the firm as a whole:
Savings to the firm if Division A buys all 37,000 units	$740,000
Opportunity cost of loss sales	884,000
Net loss to the firm	$(144,000)

How would your answer differ if division A would accept partial shipment from division B and what would be the benefit from this alternative to division B?

Total capacity of division B	100,000
Maximum sales possible to outside consumers	80,000
Remaining Capacity
Contribution per unit
Total Contribution or benefit from this alternative

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

The range of transfer price

$60

to

$80