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 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?

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 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?

Managerial Accounting: The Cornerstone of Business Decision-Making

7th Edition

ISBN:9781337115773

Author:Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger

Publisher:Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger

Chapter11: Performance Evaluation And Decentralization

Section: Chapter Questions

Problem 16BEA

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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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