Oxford Company has two divisions. Thames Division, which has aninvestment base of $80,800,000, produces and sells 950,000 units ofa product at a market price of $145 per unit. Its variable coststotal $44 per unit. The division also charges each unit $70 offixed costs based on a capacity of 1,000,000 units.
Lakes Division wants to purchase 250,000 units from Thames.However, it is willing to pay only $138 per unit because it has anopportunity to accept a special order at a reduced price. The orderis economically justifiable only if Lakes can acquire Thames’output at a reduced price.
Required:
a. What is the ROI for Thames without thetransfer to Lakes? (Round your answer to 2 decimalplaces.)
b. What is Thames’ ROI if it transfers 250,000units to Lakes at $138 each? (Note: Assuming division Thamesoperates at capacity and adjusts regular sales to accommodatetransfer of units to Lakes) (Round your answer to 2 decimalplaces.)
c. What is the minimum transfer price for the250,000-unit order that Thames would accept if it were willing tomaintain the same ROI with the transfer as it would accept byselling its 950,000 units to the outside market? (Note: Assumingdivision Thames operates at capacity and adjusts regular sales toaccommodate transfer of units to Lakes) (Round your answerto 2 decimal places.)
