Oxford Company has two divisions. Thames Division, which has an investment base
ID: 2438593 • Letter: O
Question
Oxford Company has two divisions. Thames Division, which has an investment base of $80,600,000, produces and sells 950,000 units of a product at a market price of $149 per unit. Its variable costs total $40 per unit. The division also charges each unit $70 of fixed costs based on a capacity of 1,000,000 units.
Lakes Division wants to purchase 240,000 units from Thames. However, it is willing to pay only $142 per unit because it has an opportunity to accept a special order at a reduced price. The order is economically justifiable only if Lakes can acquire Thames’ output at a reduced price.
Required:
a. What is the ROI for Thames without the transfer to Lakes? (Round your answer to 2 decimal places.)
b. What is Thames’ ROI if it transfers 240,000 units to Lakes at $142 each? (Note: Assuming division Thames operates at capacity and adjusts regular sales to accommodate transfer of units to Lakes) (Round your answer to 2 decimal places.)
c. What is the minimum transfer price for the 240,000-unit order that Thames would accept if it were willing to maintain the same ROI with the transfer as it would accept by selling its 950,000 units to the outside market? (Note: Assuming division Thames operates at capacity and adjusts regular sales to accommodate transfer of units to Lakes) (Round your answer to 2 decimal places.)
ROI %Explanation / Answer
a ROI for Thames without the transfer to Lakes Income Sales 141550000 Less : Variable cost -38000000 Less : fixed cost -70000000 Income 33550000 ROI = 33550000/80600000 41.63% b Capacity is 1000000 units so regular sales would be (1000000-240000) = 760000 units Income (760000*(149-40)+(240000*(142-40)-70000000 Income = $ 37320000 ROI = 37320000/80600000 46.30% c (760000*(149-40)+(240000*(TP-40)-70000000 82840000+240000TP-9600000-70000000 = 33550000 Solving above would give Transfer price of $ 126.29
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