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 It sells 100,000 units of equipment to outside customers at $130 per unit. Operating capacity is currently at 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 $980,000. Income per unit for Division A (assuming parts are 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 50,000 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?
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?
Complete this question by entering your answers in the tabs below.
Req 1
Req 2
Req 3
Division A proposes to buy 50,000 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 Effect on firm's operating income Req 1
Req 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?
Division B capacity Division B capacity to sell to Division A after all external sales What is the range of transfer prices over which the divisional managers might negotiate a final transfer price?
The range of transfer price to