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 57,500 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 $640,000

Income per Unit for Division A (assuming parts purchased externally, not internally from division B)

Required:

1. Division A wants to buy 28,750 units from Division B at $75 per unit. Should Division B accept or reject the proposal to sell the 28,750 units? (a). Calculate the net operating profit or loss to Division B and to the firm as a whole if the 28,750 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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$ 320 Sales revenue Manufacturing costs: Cellular equipment Other materials Fixed costs Total manufacturing costs Gross margin Marketing costs: Variable Fixed Total marketing costs Operating income per unit 50 $ 140 Req 1 Reg 1A Req 1B Reg 2 Division A wants to buy 28,750 units from Division B at $75 per unit. Calculate the net operating profit or loss to Division B and to the firm as a whole if the 28,750 units are sold to Division A. Division A requires all 28,750 units Net operating profit/loss to Division B: Total Contribution Forgone contribution of not selling to outside consumers $ Net operating profit/loss to the firm as a whole: Savings to the firm if Division A buys all 28,750 units Reg 1 Reg 1A Reg 1B Reg 2 Division A wants to buy 28,750 units from Division B at $75 per unit. Calculate the net benefit to the firm as a whole if Division A will accept a partial shipment from Division B. Total capacity of division B Maximum sales possible to outside consumers Remaining Capacity Savings per unit Total benefit from this alternative Reg 1 Req 1A Req 1B Reg 2 What is the range of transfer prices over which the divisional managers might negotiate a final transfer price? The range of transfer price to