The St. Lawrence Instruments Company uses the decentralized form of organizational structure and considers each of its divisions as an investment center. The Victoria division is currently selling 12,000 air filters annually, although it has sufficient productive capacity to produce 16,000 units per year. Variable manufacturing costs amount to $24 per unit, while the total fixed costs amount to $50,000. These 12,000 air filters are sold to outside customers at $70 per unit. The Halifax division, also a part of St. Lawrence Instruments, has indicated that it would like to buy 1,300 air filters from the Victoria division, but at a price of $40 per unit. This is the price the Halifax division is currently paying an outside supplier.

Requirements 1. Compute the effect on the operating income of the company as a whole if the Halifax division purchases the 1,300 air filters from the Victoria division. 2. What is the minimum price that the Victoria division should be willing to accept for these 1,300 air filters? 3. What is the maximum price that the Halifax division should be willing to pay for these 1,300 air filters? 4. Suppose instead that the Victoria division is currently producing and selling 16,000 air filters annually to outside customers. What is the effect on the overall St. Lawrence Instruments Company operating income if the Victoria division is required by top management to sell 1,300 air filters to the Halifax division at (a) $24 per unit and (b) $40 per unit? 5. For this question only, assume that the Victoria division is currently earning an annual operating income of $24,000, and the division's average invested capital is $150,000. The division manager has an opportunity to invest in a proposal that will require an additional investment of $8,000 and will increase annual operating income by $720. (a) Should the division manager accept this proposal if the St. Lawrence Instruments Company uses ROI in evaluating the performance of its divisional managers? (b) If the company uses economic profit? (Assume a cost of capital of 8%.)