Question

multiple business units, organelular equipment from Phoenix Inc., a cellular communication company, has multiple business units, organized as divisions. Each division's management is mpensated 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 As manager approaches division B's manager with a proposal to buy the equipment from division B. If it es the cellular equipment that division A desires, division B will incur variable manufacturing costs of $60 per unit somers but not to Relevant information about Division B Sells 77,500 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 $800,000 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 Foed Total marketing costs Operating income per unit 50 $ 140 Required: 1. Division A wants to buy 36.000 units from division B atrope B. Should division B accept or reject the proposal7 How would y be shipped by the same supplier and what would be the net opera would accept partial shipment from division B and what would be the benefit from 2. What is the range of transfer prices over which the divisional managers units from division B at $75 per unit. Determine the contribution margin for each type sale by division Proposal? How would your answer differ if (a) division A requires all 36,000 units in the order to at would be the net operating loss or gain to division B and the firm as a whole, or (b) division A would be the benefit from this alternative to division B? al managers might negotiate a final transfer price?

Answer 1

Answer Division Bhas capacity to grockeure cunits = 50,000 O 0.26 = 621500 A will require units = 25,000 which will limit By outside sales to 37,500 units. a loss in oul side sale = 50.000-37,500 = 12.500 units The contribution for each type o sale by Division B is, . To Division A Corrtribution margin = selling price - variable costs per unit = $75 - 60 out side. Contribuetion margin = selling price-wariable costs per unit - variable marketing costs =$130-70-8

Determining the best Decision Let us assume Division A regies all a5,000 unirls, vision B is to not sell The best decision in the in- all.25,000 units to Division A. Contribution d selling 25,000 unit's to an no unids to division A . = $15x25,000 = $375,000 forgone contribution & . selling to outside consumers = $52 x 12,500 - $650,000 neet opereeting loss to Division B-fa sales to Division A = $650,000 - $375,000 = $275,000 The proposal reduces division B's operating income by $275,000. .: The Division B manager should rjeet the proposal.

Also, The dursion or division B to not sell inside is in the best interest of the firm as a whole. The savings to the form o Division A bayang inside - (80-60) X 25,000 = 20x25000 =$500,000 while, . The opportunity cost do lost sales = (30-18 ]x 121500 = S2x2,500 =$650,000 for a net losse the fiven = 650,000–500,000 -$150,000 19.45 (continuech) partial sales to Division A care ok. if Division B should sell. as many unit's as possible Con this case 50,000 dl total demand) to "oulside Consumer so the remaining capacity (acr}. Or 12.500 units) should bewed to provide Division A with Equipment

2) nxt operating P/1. to Division B loss to B = Toteed contribution – Contribution foregone.. = (sX40000) – (sax (400 00–21875)) = 600000 _qua500 = - 342500 net operating ple to from Saving to form a buys all tow 3 = 40ccox (80-60) 40000 x 20 5800000 Remaining capacity = total capacity – maximum sale posible - (8750040-20) – 87500 = 109375 – 87500 21875 Contribution = percaining capacity x Contribution par unit - 21875 XIS = 398125