Question

In: Accounting

Phoenix Inc., a cellular communication company, has multiple business units, organized as divisions. Each division’s management...

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 95,000 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 $940,000

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 47,500 units from Division B at $75 per unit. Should Division B accept or reject the proposal to sell the 47,500 units? (a). Calculate the net operating profit or loss to Division B and to the firm as a whole if the 47,500 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?

Solutions

Expert Solution

1. Division A wants to buy 47,500 units from Division B at $75 per unit. Should Division B accept or reject the proposal to sell the 47,500 units? (a). Calculate the net operating profit or loss to Division B and to the firm as a whole if the 47,500 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.

Existing Units sold = 95000

Capacity = 95000/80% = 118750

Incremental Contribution (118750-95000) * ($75 - $60)

$356250

Contribution lost (47500 – 23750)*($130-$70-$8-$15)

($878750)

Loss to Division B

($522500)

Division B should reject the proposal

(a) Calculation of Total Profit or Loss to the firm:

$

Profit (Loss) to Division B

($522500)

Profit to Division A = ($80 -$75) x 47500 units

$237500

Net Profit or (Loss) to the firm

($285000)

(b)

Calculation of Total Profit or Loss to the firm:

$

Profit to Division B [23750 * ($75 - $60) = $356250]

                        $356250

Profit to Division A = ($80 -$75) x 23750 units

$118750

Net Profit or Loss to the firm

                        $475000.00

2. What is the range of transfer prices over which the divisional managers might negotiate a final transfer price?

Range of transfer would be between the variable manufacturing cost for Division B manufacturing the units for division A i.e.$60 and market price at which the product is available for Division A in the outside market i.e. $80

ekkarill92 answered 1 year ago
Next > < Previous

Related Solutions

Phoenix Inc., a cellular communication company, has multiple business units, organized as divisions. Each division’s management...
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...
Phoenix Inc., a cellular communication company, has multiple business units, organized as divisions. Each division’s management...
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...
Marlon Inc. has 2 divisions. Each division’s required rate of return is the same as the...
Marlon Inc. has 2 divisions. Each division’s required rate of return is the same as the firm’s which is 15 percent. Planned operating results for 2002 are as follows: Division Income Invested Capital Lagos $50 million $250 million Enugu       $22 million $100 million                               Requirement A: a) Compute the ROI of both divisions and compare their performances based on ROI. Which division is performing better based on ROI? b) Compute the Residual Income (RI) of both divisions and compare...
Consolidated Industries is a diversified manufacturer with business units organized as divisions, including the Reigis Steel...
Consolidated Industries is a diversified manufacturer with business units organized as divisions, including the Reigis Steel Division. Consolidated monitors its divisions on the basis of both unit contribution and return on investment (ROI), with investment defined as average operating assets employed. All investments in operating assets are expected to earn a minimum return of 9% before income taxes. Reigis’s cost of goods sold is considered to be entirely variable; however, its administrative expenses do not depend on volume. Selling expenses...
Wild Sun Airlines Inc. has two divisions organized as profit centers, the Passenger Division and the...
Wild Sun Airlines Inc. has two divisions organized as profit centers, the Passenger Division and the Cargo Division. The following divisional income statements were prepared: WILD SUN AIRLINES INC. Divisional Income Statements For the Year Ended December 31, 20Y9 1 Passenger Division Cargo Division 2 Revenues $3,065,000.00 $3,065,000.00 3 Operating expenses 2,425,000.00 2,754,000.00 4 Income from operations before service department charges $640,000.00 $311,000.00 5 Less service department charges: 6 Training $135,150.00 $135,150.00 7 Flight scheduling 97,200.00 97,200.00 8 Reservations 151,400.00...
Red Line Railroad Inc. has three regional divisions organized as profit centers. The chief executive officer...
Red Line Railroad Inc. has three regional divisions organized as profit centers. The chief executive officer (CEO) evaluates divisional performance, using income from operations as a percent of revenues. The following quarterly income and expense accounts were provided from the trial balance as of December 31: Revenues—East $ 862,000 Revenues—West 1,036,000 Revenues—Central 1,890,000 Operating Expenses—East 563,600 Operating Expenses—West 621,840 Operating Expenses—Central 1,167,900 Corporate Expenses—Shareholder Relations 150,000 Corporate Expenses—Customer Support 360,000 Corporate Expenses—Legal 252,000 General Corporate Officers’ Salaries 274,500 The company...
Traxonia Railroad Inc. has three regional divisions organized as profit centers. The chief executive officer (CEO)...
Traxonia Railroad Inc. has three regional divisions organized as profit centers. The chief executive officer (CEO) evaluates divisional performance, using income from operations as a percent of revenues. The following quarterly income and expense accounts were provided from the trial balance as of December 31, 2016: Revenues—East $ 866,000 Revenues—West 1,030,000 Revenues—Central 1,890,000 Operating Expenses—East 565,700 Operating Expenses—West 627,360 Operating Expenses—Central 1,170,060 Corporate Expenses—Shareholder Relations 156,000 Corporate Expenses—Customer Support 320,000 Corporate Expenses—Legal 255,200 General Corporate Officers’ Salaries 273,500 The company...
Profit Center Responsibility Reporting A-One Freight Inc. has three regional divisions organized as profit centers. The...
Profit Center Responsibility Reporting A-One Freight Inc. has three regional divisions organized as profit centers. The chief executive officer (CEO) evaluates divisional performance using operating income as a percent of revenues. The following quarterly income and expense accounts were provided from the trial balance as of December 31, 20Y3. Revenues—Air Division $ 1,290,700 Revenues—Rail Division 1,562,500 Revenues—Truck Division 2,729,100 Operating Expenses—Air Division 817,900 Operating Expenses—Rail Division 929,900 Operating Expenses—Truck Division 1,650,400 Corporate Expenses—Shareholder Relations 196,300 Corporate Expenses—Customer Support 665,000 Corporate...
Red Line Railroad Inc. has three regional divisions organized as profit centers. The chief executive officer...
Red Line Railroad Inc. has three regional divisions organized as profit centers. The chief executive officer (CEO) evaluates divisional performance, using income from operations as a percent of revenues. The following quarterly income and expense accounts were provided from the trial balance as of December 31: Revenues—East $878,000 Revenues—West 1,042,000 Revenues—Central 1,880,000 Operating Expenses—East 563,600 Operating Expenses—West 619,680 Operating Expenses—Central 1,172,940 Corporate Expenses—Shareholder Relations 155,000 Corporate Expenses—Customer Support 333,000 Corporate Expenses—Legal 233,100 General Corporate Officers’ Salaries 278,500 The company operates...
Red Line Railroad Inc. has three regional divisions organized as profit centers. The chief executive officer...
Red Line Railroad Inc. has three regional divisions organized as profit centers. The chief executive officer (CEO) evaluates divisional performance, using income from operations as a percent of revenues. The following quarterly income and expense accounts were provided from the trial balance as of December 31: Revenues—East $ 878,000 Revenues—West 1,042,000 Revenues—Central 1,880,000 Operating Expenses—East 563,600 Operating Expenses—West 619,680 Operating Expenses—Central 1,172,940 Corporate Expenses—Shareholder Relations 155,000 Corporate Expenses—Customer Support 333,000 Corporate Expenses—Legal 233,100 General Corporate Officers’ Salaries 278,500 The company...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT