Universal Corporation’s division S has an investment base of $600,000. The division 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. The fixed cost is computed as $5 per unit, based on planned production of 100,000 units. The budgeted and actual fixed overhead are equal, and any volume variances are closed to Cost of Goods Sold.

Division T wants to purchase 20,000 units from division S but is willing to pay only $6.20 per unit because it 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 S would accept if it were willing to maintain the same ROI with the transfer as it would accept by selling its 90,000 units to the outside market?