Problem $19-49($Algo$)$ Transfer Pricing; Decision Making $[$LO $19-4]$

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 Divislon A at this time. Division A$\text{'}$s manager approaches Division B$\text{'}$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 varlable manufacturing costs of $$60$ per unit.

Relevant Information about DNislon B

Sells $57,500$ units of equipment to outside customers at $$130$ per unit Operating capacity is currently $80\%$; the division can operate at $100\%$

Varlable manufacturing costs are $$70$ per unit

Varlable marketing costs are $$8$ per unit

Fixed manufacturing costs are $$640,000$

Income per Unit for Division A $($assuming parts purchased externally, not internally from division B$)$

Sales revenue

Manufacturing costs:

Cellular equipment

Other materials

$,$ Fixed costs

Total manufacturing costs

Gross margin

Marketing costs:

Variable

Fixed

Total marketing costs

Operating incone per unit

Required:

Division A proposes to buy $28,750$ units from Division $B$ at $$75$ per unit. What would be the effect of accepting this proposal on Divislon B$\text{'}$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 $$75$ per unit, if any? What would be the effect on Division B$\text{'}$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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hequired $1$

Divizion A proposes to buy $28,750$ units from Division $6$ at $$75$ per unit. What would be the effect of accepting this proposal on Division B$\text{'}$s operating income? What would be the effeat on the operating income of Phoenix Incorporated as a whole?