H A Canadian Imaple syrup company has a Toronto division and a Montreal division. The Toronte division sells 15,000 boxes of syrup a year and has capacity to produce 21,000 a year. 2 Variable manufacturing costs are $21.00/box and total fixed costs are $90,000/year. These 15,000 boxes are sold to outside customers for $40/box. 3 The Montreal division would like to buy 1,500 boxes of syrup from the Toronto division for $37/box which is the price of a box of syrup from a competing maple syrup company 5 a) If the Montreal division purchases 1,500 boxes of syrup from the Toronto division for $37/box, what is the overall effect on operating income for the Toronto division? (6 marks) 7 b) What is the minimum transfer price per box the Toronto division is willing to accept and what is the maximum transfer price the Montreal division is willing to pay? (4 marks) B 9 c) Assume the Toronto division is currently earning an annual operating income of $36,000 and the divisions average invested capital is $300,000 10 The division manager has an opportunity to invest an additional $20,000 in plant equipment creating an increase in operating income of $2,000. 11 With a cost of capital of 7%, should the manager pursue this opportunity if Return On Investment (ROI) is used to evaluate the managers performance? (5 marks) 12 What if Economic Profit is the metric used to evaluate managerial performance? Show calculations to back up your answers. (5 marks) 13 14 Part A & B Information Toronto Division Part C Operating Income $ 36,000.00 15 Boxes Sold 15,000 Average Invested Capital $ 300,000.00 16 Capacity 21.000 Cost of Capital 7% 17 Variable Costs/Box $ 21.00 18 Fixed Costs S 90,000.00 Before Investment After Investment Pursue Investment? Selling Price/Box $ 19 40.00 ROI Yes or No? 20 Economic Profit Yes or No? 21 20 22 2 After Selling to Montreal Division Part a) New Operating Income 24 b) Minimum Transfer Price 25 b) Maximum Transfer Price 26 27 28