Phoenix Incorporated, 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 97,500 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 $960,000 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 48,750 units from Division B at $75 per unit. What would be the effect of accepting this proposal on Division Bs 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 Bs 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?