Question

Required information [The following information applies to the questions displayed below.) Oxford Company has two divisions. Thames Division, which has an investment base of $80,200,000, produces and sells 900,000 units of a product at a market price of $143 per unit. Its variable costs total $37 per unit. The division also charges each unit $70 of fixed costs based on a capacity of 950,000 units. Lakes Division wants to purchase 240,000 units from Thames. However, it is willing to pay only $137 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 $137 each? (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 900,000 units to the outside market? (Round your answer to 2 decimal places.) a. ROI b. ROI c. Minimum transfer price per unit

Answer 1

a. ROI b. JROI c. Minimum Transfer Price 36.03 % 40.85 % $ 119.92 per unit $ 2,89,00,000 a. ROI for Thames Division Income = (900,000 X ($143 - $37) - 950,000 X $70) = ROI = Net Income / Investment ROI = $28,900,000 / $80,200,000 36.03% b. Capacity is 950,000 units, so regular sales would be reduced to 710,000 units (950,000 units capacity – 240,000 units to Lakes Division) Income = (710,000 X $106 + 240,000 X ($137 - $37) - $66,500,000 = $ 3,27,60,000 ROI = Net Income / Investment ROI = $32,760,000 / $80,200,000 40.85% c. Because investment does not change income will be $28,900,000 at old ROI (710,000 X $106) + 240,000 X (TP-$37) - $66,500,000 = $ 2,89,00,000 $75,260,000 + 240,000 TP - $8,880,000 - $66,500,000 = $ 2,89,00,000 240,000 TP = $28,780,000 TP = = $28,780,000 / 240,000 TP = $ 119.92