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.) ROI 36.03 % a. 40.85 % b. ROI Minimum transfer price C. per unit

Looking for the answer to C

Answer 1

As per the ROI calculated income of Thames without transfer to lakes = 80,200,000 x 36.03% = 28896060

Now Thames is expected to earn the above income when the transfer price is being decided.

So for calculating the transfer price following equation will solved

= {(Regular units to be sold to outsiders x (Sale price per unit- variable cost per unit))+ (Sales to lakes division ( TRANSFER PRICE- variable cost per unit))} - total fixed cost = 28896060

={ (950000( total capacity)- 240000( sales to lake division) x (143-37) ) + (240000 (TRANSFER PRICE- 37))} 950000*70 = 28896060

= (75260000 + 240000 TRANSFER PRICE - 8880000) - 66500000 = 28896060

= 66380000 + 240000 TRANSFER PRICE = 95396060 ( subtracting 75260000 & 8880000 and adding 28896060 & 66500000)

= Transfer price =95396060 - 66380000 / 240000 = 120.90 or 121