Phoenix Inc., a cellular communication company, has multiple business units, organized as divisions. Each division's management is compensated based on the division's 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 customers-but not to division A at this time. Division A's manager approaches division B's 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 Manufacturing costs: Cellular equipment Other materials Fixed costs Total manufacturing costs Gross margin Marketing costs: Variable Fixed Total marketing costs Operating income per unit 320 80 10 40 130 190 35 15 50 $140 Required: 1. Division A wants to buy 40,000 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 40,000 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. Complete this question by entering your answers in the tabs below. Req 1A Req 1B Req 1C Req 2 Division A wants to buy 40,000 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 AOu Outside Selling Price Contribution Margin Should division B accept or reject the proposal? Req 1A Req1B Complete this question by entering your answers in the tabs below. Reg 1AReq 1BReq 1C Req 2 How would your answer differ if division A requires all 40,000 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 40,000 units Net operating profitloss to Division B: Total Contribution Forgone contribution of not selling to outside consumers Net operating profitloss to the firm as a whole: Savings to the firm if Division A buys all 40,000 units Req1A to be shipped by the same suppliler and what would be the net operating loss or galn to alvo Band the rirm 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 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 Maximum sales possible to outside consumers Remaining Capacity Contribution per unit Total Contribution or benefit from this alternative Req 1B Req 2 > Complete this question by entering your answers in the tabs below. Req 1A Req 1B Req 1C Req 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 Req1C Req 2
