Managerial Accounting: The Cornerstone of Business Decision-Making
7th Edition
ISBN: 9781337115773
Author: Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger
Publisher: Cengage Learning
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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
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:
- Division A proposes to buy 47,500 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?
- 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?
- What is the range of transfer prices over which the divisional managers might negotiate a final transfer price?
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