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 95,000 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 $940,000

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 47,500 units from Division B at $75 per unit. Should Division B accept or reject the proposal to sell the 47,500 units? (a). Calculate the net operating profit or loss to Division B and to the firm as a whole if the 47,500 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?