Phoenix Inc., 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 50,000 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 $580,000

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 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 you provide.