Phoenix Incorporated, 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 customersbut 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 85,000 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 $860,000 Income per Unit for Division A (assuming parts purchased externally, not internally from division B) $ 320 80 10 49 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 130 190 35 15 50 $ 140 Required: 1. Division A proposes to buy 42,500 units from Division B at $75 per unit. What would be the effect of accepting this proposal on Division B's operating income? What would be the effect on the operating income of Phoenix Incorporated as a whole? 2. Now suppose Division A could purchase from multiple suppliers and would accept partial shipment from Division B. How many units should Division B sell to Division A at $75 per unit, if any? What would be the effect on Division B's operating income? What would be the effect on the operating income of Phoenix Incorporated as a whole? 3. 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 1 Req 2 Reg 3 Division A proposes to buy 42,500 units from Division B at $75 per unit. What would be the effect of accepting this proposal on Division B's operating income? What would be the effect on the operating income of Phoenix Incorporated as a whole? Effect on division B's operating income Effect on firm's operating income Reg 1 Req 2 Reg 3 Now suppose Division A could purchase from multiple suppliers and would accept partialshipment from Division B. How many units should Division B sell to Division A at $75 per unit, if any? What would be the effect on Division B's operating income? What would be the effect on the operating income of Phoenix Incorporated as a whole? Division B capacity Division B capacity to sell to Division A after all external sales Complete this question by entering your answers in the tabs below. Reg 1 Reg 2 Reg 3 What is the range of transfer prices over which the divisional managers might negotiate a final transfer price? The range of transfer price to
