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 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 $ $320$

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 proposes to buy $43,750$ 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 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?

$3.$ What is the range of transfer prices over which the divisional managers might negotiate a final transfer price?