Problem 19-49 (Algo) Transfer Pricing: Decision Making [LO 19-4] 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 60,000 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 $660,000 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 130 190 Gross margin Marketing costs: Variable 35 Fixed 15 Total marketing costs 50 Operating income per unit $ 140 Complete this question by entering your answers in the tabs below. Req 1 Req 2 Req 3 Division A proposes to buy 30,000 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 Loss Effect on firm's operating income Loss Reg Req 2 > Req 1 Req 2 Req 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 Increase in B operating income from partial sales to A Increase in Phoenix Incorporated operating income from B sale s to A Req 1 Req 2 Req 3 What is the range of transfer prices over which the divisional managers might negotiate a final transfer price? The range of transfer price $ 60 to $ 80 Req3 Req 1 Req 2 Req 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 Increase in B operating income from partial sales to A Increase in Phoenix Incorporated operating income from B sale s to A Req 1 Req 2 Req 3 What is the range of transfer prices over which the divisional managers might negotiate a final transfer price? The range of transfer price $ 60 to $ 80 Req3
