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 87,500 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 $880,000

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:

A) Division A wants to buy 43,750 units from Division B at $75 per unit. Should Division B accept or reject the proposal to sell the 43,750 units?

	To Division A	Outside
Selling Price
Contribution Margin
Should division B accept or reject the proposal?

B) Division A wants to buy 43,750 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 43,750 units are sold to Division A.

Division A requires all 43,750 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 43,750 units

C)

Division A wants to buy 43,750 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

D)

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

The range of transfer price

to