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 90,000 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 $900,000   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 45,000 units from Division B at $75 per unit. Should Division B accept or reject the proposal to sell the 45,000 units? (a). Calculate the net operating profit or loss to Division B and to the firm as a whole if the 45,000 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?

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
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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 90,000 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 $900,000

 

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 45,000 units from Division B at $75 per unit. Should Division B accept or reject the proposal to sell the 45,000 units? (a). Calculate the net operating profit or loss to Division B and to the firm as a whole if the 45,000 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?

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