Phoenix Inc., a cellular communication company, has multiple divisions. Each divisions management is compensated based on the
Question:
Phoenix Inc., a cellular communication company, has multiple 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 would incur variable manufacturing costs of $60 per unit.
Relevant Information about Division B
Sells 50,000 units of equipment to outside customers at $130 per unit.
Operating capacity is currently 80 percent; the division can operate at 100 percent.
Variable manufacturing costs are $70 per unit.
Variable marketing costs are $8 per unit.
Fixed manufacturing costs are $580,000.
Income per Unit for Division A (assuming parts purchased outside, not from division B)
Relevant Information about Division B | ||
Sells units of equipment to outside customers | 50,000 | |
Selling price per unit | $130 | |
Operating capacity is currently | 80% | percent |
The division can operate at | 100% | percent |
Variable manufacturing costs are | $70 | per unit. |
Variable marketing costs are | $8 | per unit. |
Fixed manufacturing costs are | $580,000 | |
Variable manufacturing costs if manufacured for Div A | $60 | |
Income per Unit for Division A (assuming parts purchased outside, not 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 all 25,000 units from division B at $75 per unit. Should division B accept or reject the proposal? How would your answer differ if (a) Division A requires all 25,000 units in the order to be shipped by the same supplier, or (b) Division A would accept partial shipment from Division B?
2. What is the range of transfer prices over which the divisional managers might negotiate a final transfer price? Provide a rationale for the range youprovide.
Step by Step Answer:
Cost management a strategic approach
ISBN: 978-0073526942
5th edition
Authors: Edward J. Blocher, David E. Stout, Gary Cokins