Question
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
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?
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?
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Please help!
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