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 92,500 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 $920,000

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 46,250 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 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 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?

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