(30 Points)

The Power Corp. operates two divisions, Motor and Chainsaw. Currently the Motor Division is working at 90% of their normal capacity of 100,000 units.

The Motor Division manufactures a heavy-duty motor that can be used for midsize tools. The variable costs of manufacturing are $169 per unit and fixed manufacturing costs per unit are $23 at a level of 100,000 units of production. Of the 100,000 motors that could be produced annually, 90,000 are sold to external customers. There is no external demand for the remaining 10,000 units of capacity. The Chainsaw Division currently purchases 10,000 similar motors from a competitor. They could be produced by the Motor Division, but the two division managers have not been able to agree on the price at which these motors should be sold. The Chainsaw Divisions manager has offered to pay $195, which is the price at which the motors can be purchased from an outside supplier. The Motor Divisions manager feels that the Chainsaw Division should pay $210, which is the current sales price to external customers.

The companys controller has performed an analysis of the Motor Division and has determined that if the division does not sell to the Chainsaw Division, it can reduce capacity to the 90,000-unit level needed to satisfy the outside customers. This option would eliminate fixed costs of $50,000 and free up enough space to produce a new product that is estimated to bring in an annual contribution margin of $35,800.

Division assets for the Motor Division are:
Cash	$ 950,000
Inventories	1,926,000
Property, plant, and equipment, net	4,828,450
Total division assets	$7,704,450

Required:

Assuming you are the manager of the Motor Division, should you sell the motors to the Chainsaw Division at $195? By how much will your divisional profit increase or decrease if you sell to the Chainsaw Division rather than introduce the new product?

Assume that management decides the motors will be sold to the Chainsaw Division using a transfer price of $195. At what price will the 90,000 motors sold to external customers need to be to achieve a 20% return on assets for the Motor Division?