Oxford Company has two divisions. Thames Division, which has an investment base
ID: 2542375 • Letter: O
Question
Oxford Company has two divisions. Thames Division, which has an investment base of $82,000,000, produces and sells 1,000,000 units of a product at a market price of $140 per unit. Its variable costs total $31 per unit. The division also charges each unit $70 of fixed costs based on a capacity of 1,050,000 units.
Lakes Division wants to purchase 280,000 units from Thames. However, it is willing to pay only $134 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 280,000 units to Lakes at $134 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 280,000-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 1,000,000 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.)
Explanation / Answer
1. Calculation of ROI
ROI=Net Income/Investment*100
=35500000/85000000*100=43.29%
2. Calculation of ROI
ROI=Net Income/Investment*100
=39270000/85000000*100=46.20%
It is assumed that iy will operte at full capacity.
3. Transfer Price will be 109 P.U. if it Produces only 1000000 units
If it Produces 10500000 units then Transfer price will be RS. 89.54 by opportunity concept
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