19-11. Phoenix Inc., a cellular communication company, has multiple business units, organized as divisions. Each divisions management is compensated based on the divisions 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 customersbut not to division A at this time. Division As manager approaches division Bs 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 52,500 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 $600,000 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 26,000 units from division B at $75 per unit. Determine the contribution margin for each type sale by division B. Should division B accept or reject the proposal? How would your answer differ if (a) division A requires all 26,000 units in the order to be shipped by the same supplier and what would be the net operating loss or gain to division B and the firm as a whole, or (b) division A would accept partial shipment from division B and what would be the benefit from this alternative to division B?

1A.

1B.

1C.

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

Outside To Division A Selling Price Less: Variable costs per unit Less: Variable marketing costs Contribution Margin Should division B accept or reject the proposal? Division A requires all 26,000 units Net operating profit/loss to Division B: Total Contribution Forgone contribution of not selling to outside consumers Net operating loss to division B | $ 0 Net operating profit/loss to the firm as a whole: Savings to the firm if Division A buys all 26,000 units Opportunity cost of loss sales Net loss to the firm SO Outside To Division A Selling Price Less: Variable costs per unit Less: Variable marketing costs Contribution Margin Should division B accept or reject the proposal? Division A requires all 26,000 units Net operating profit/loss to Division B: Total Contribution Forgone contribution of not selling to outside consumers Net operating loss to division B | $ 0 Net operating profit/loss to the firm as a whole: Savings to the firm if Division A buys all 26,000 units Opportunity cost of loss sales Net loss to the firm SO