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 Division 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 variable manufacturing

costs of $$60$ per unit.

Relevant Information about Division B

Sells $75,000$ 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 $$780,000$

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

Required:

Division A proposes to buy $37,500$ units from Division B at $$75$ per unit. What would be the effect of accepting this propos on

Division B$\text{'}$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$\text{'}$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?

Complete this question by entering your answers in the tabs below.

Division A proposes to buy $37,500$ units from Division B at $$75$ per unit. What would be the effect of accepting this proposal

on Division B$\text{'}$s operating income? What would be the effect on the operating income of Phoenix Incorporated as a whole?