PROBLEM AAA: ABC Copany has two divisions. Land Division, which has operating as
ID: 2479036 • Letter: P
Question
PROBLEM AAA: ABC Copany has two divisions. Land Division, which has operating assets of $80,000,000 produces and sells 900,000 units of a product at a market price of $140 per unit. Variable costs total $40 per unit. The division also assigns $70 of fixed costs to each unit based on total capacity of 1,000,000 units. Sea Division wants to purchase 200,000 units from Land. However, it is only willing to pay $80 per unit because it has an opportunity to accept a special order at a reduced price. The order is economically justifiable only if Sea Division can acquire Land Division’s output at a reduced price. Boots Company’s cost of capital is 15%. Required: a. What is the ROI for Land Division without the transfer to Sea Division? b. What is Land Division’s ROI if it transfers 200,000 units to Sea Division at $80 each? c. What is the minimum transfer price for the 200,000-unit order that Land would accept if it were willing to maintain the same ROI with the transfer as it would accept by selling its 900,000 units to the outside market? d. What is the sales revenue at this transfer price? e. What is the residual income for Land Division without the transfer to Sea Division? f. What is Land Division’s residual income if it transfers 200,000 units to Sea Division at $80 each? g. What is the minimum transfer price for the 200,000-unit order that Land would accept if it were willing to maintain the same residual income with the transfer as it would accept by selling its 900,000 units to the outside market? h. If Land Division had no capacity constraints, what is the minimum transfer price it could accept on the order from Sea Division? Explain your answer. i. If Land Division could sell all units produced to the outside market, what transfer price would you recommend? Why?
Please be sure to show how you got each answer
Explanation / Answer
a. ROI for land division without transfer is as shown below:
Return on investment is calculated using the below-mentioned formula:
Return on Investment = Income/Invested Capital
b.
Land Division’s ROI if it transfers 200,000 units to Sea Division at $80 each is as shown below:
c. Minimum transfer price for the 200,000-unit order that Land would accept if it were willing to maintain the same ROI with the transfer as it would accept by selling its 900,000 units to the outside market will be $140 per unit.
d.
Sales revenue at this transfer price will be $200,000*140 = $28,000,000
Particulars Amount ($) Sale Revenue 126000000 Less: Cost of goods sold 36000000 Gross margin 90000000 Fixed Costs (1,000,000*70) 70000000 Net profit 20000000 Average Operating assets 800,00,000 ROI= Net Income/ Average operating assets 25%Related Questions
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