In: Accounting
Phoenix Inc., 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 75,000 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 $780,000
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 wants to buy 37,500 units from Division B at $75 per unit. Should Division B accept or reject the proposal to sell the 37,500 units?
(a). Calculate the net operating profit or loss to Division B and to the firm as a whole if the 37,500 units are sold to Division A.
(b.) Calculate the net benefit to the firm as a whole if Division A will accept a partial shipment from Division B.
2. What is the range of transfer prices over which the divisional managers might negotiate a final transfer price?