Athena Company has two divisions. Spartan Division, which has operating assets o
ID: 2480024 • Letter: A
Question
Athena Company has two divisions. Spartan 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.
Trojan Division wants to purchase 200,000 units from Spartan. 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 Trojan Division can acquire Spartan Division’s output at a reduced price.
Athena Company’s cost of capital is 15%.
Required:
1) What is the minimum transfer price for the 200,000-unit order that Spartan 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?
2) What is the sales revenue at this transfer price?
3) If Spartan Division had no capacity constraints, what is the minimum transfer price it could accept on the order from Trojan Division? Explain your answer.
4) If Spartan Division could sell all units produced to the outside market, what transfer price would you recommend? Why?
Explanation / Answer
Spartan division Operating assets 80,000,000 units prod 900,000 units Capacity 1,000,000 units Excess capacity 100,000 units MP 140 VC 40 contribution per unit 100 sales revenue 126,000,000 1) for spartan division if it has to maintain the division ROI , it must transfer at the same rate as it transfer to outside market 140 Trojan division: requirement 200,000 Selling price 80 sales revenue 16,000,000 2) total sales revenue 142,000,000 3) with no capacity contraint minimium price would be 40 4) VC 40 FC 70 Transfer price per unit 110
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.