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
Sells 72,500 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 \( \$ 760,000 \)
Income per Unit for Division A (assuming parts purchased externally, not internally from division B)
\begin{tabular}{|c|c|c|}
\hline Sales revenue & & \$ 320 \\
\hline \multicolumn{3}{|l|}{Manufacturing costs: \( \$ 320 \)} \\
\hline Cellular equipment & 80 & \\
\hline Other materials & 10 & \\
\hline Fixed costs & 40 & \\
\hline Total manufacturing costs & & 130 \\
\hline Gross margin & & 190 \\
\hline \multicolumn{3}{|l|}{Marketing costs:} \\
\hline Variable & 35 & \\
\hline Fixed & 15 & \\
\hline Total marketing costs & & 50 \\
\hline Operating income per unit & & \$ 140 \\
\hline
\end{tabular}
Required:
1. Division A proposes to buy 36,250 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 \( \$ 7.5 \) 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?
