Oxford Company has two divisions. Thames Division, which has an investment base of $80,000,000, produces and sells 900,000 units of a product at a market price of $140 per unit. Its variable costs total $40 per unit. The division also charges each unit $70 of fixed costs based on a capacity of 1,000,000 units.
Lakes Division wants to purchase 200,000 units from Thames. However, it is willing to pay only $80 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?
b. What is Thames' ROI if it transfers 200,000 units to Lakes at $80 each?
c. What is the minimum transfer price for the 200,000-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?