Transfer Pricing with Imperfect Markets-ROI Evaluation, Normal Costing: Division S of S&T Enterprises has an investment base
Question:
Transfer Pricing with Imperfect Markets-ROI Evaluation, Normal Costing: Division S of S&T Enterprises has an investment base of $600.000. Division S produces and sells 90,000 units of a product at a market price of $10 per unit. Its variable costs total $3 per unit. The division also charges each unit with a share of fixed costs based on capacity production of 100.000 units per year. The fixed cost "burden" is computed at $5 per unit. Any production volume variance is written off to expense at the end of the period. Division T wants to purchase 20,000 units from division S. However, division T is willing to pay only $6.20 per unit. The reason division T can pay only the lower amount is that division T has an opportunity to accept a special order at a reduced price. The order is economically justifiable only if division T can acquire the division S output at a reduced price.
Required:
a. What is the ROI for division S without the transfer to division T?
b. What is division S's ROI if it transfers 20,000 units to division T at $6.20 each?
c. What is the minimum transfer price for the 20,000-unit order that division S would accept if division S were willing to maintain the same ROI with the transfer as they would accept by selling their 90,000 units to the outside market?
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