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1. Sales $5,000,000 Cost of goods sold 3,500,000 Gross margin $1,500,000 Selling and administrative expense 500,000 Operating income $1,000,000 Income taxes (40%) 400,000 Net income $ 600,000 2. EVA = After-Tax Operating Income - (Actual Percentage Cost of Capital * Total Capital Employed) = $600,000 - 10.08 ($2,000,000 + $4,000,000)] = $600,000 - (0.08 x $6,000,000) = $600,000 - $480,000 = $120,000 n15 $10 III. Transfer Pricing The Components Division produces a part that is used by the Goods Division. The cost of man- ufacturing the part follows: Direct materials Direct labor 2 Variable overhead 3 Fixed overhead Total cost S20 * Based on a practical home of 2.000 arte. Other coses incurred by the Components Division are as follows: Fixed selling and administrative $500,000 Variable selling (per unit) The part usually sells for between $28 and $30 in the external market. Currently, the Components Division is selling it to external customers for S29. The division is capable of pro- ducing 200,000 units of the part per year. However, because of a weak economy, only 150,000 parts are expected to be sold during the coming year. The variable selling expenses are avoidable if the part is sold internally, The Goods Division has been buying the same part from an external supplier for $28. It ex- pects to use 50,000 units of the part during the coming year. The manager of the Goods Division has offered to buy 50,000 units from the Components Division for $18 per unit. Required: 1. Determine the minimum transfer price that the Components Division would accept. 2. Determine the maximum transfer price that the manager of the Goods Division would pay. 3. Should an internal transfer take place? Why or why not? If you were the manager of the Components Division, would you sell the 50,000 components for $18 cach? Explain. 4. Suppose that the average operating assets of the Components Division total $10 million. Compute the ROI for the coming year, assuming that the 50,000 units are transferred to the Goods Division for $21 each