Cost Management 6th Edition by Edward Blocher,David Stout ,Paul Juras,Gary Cokins

Exercise 30

Transfer Pricing; Decision Making 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.
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.