Athena Company has two divisions. Spartan Division, which has operating assets o
ID: 2479087 • Letter: A
Question
Athena Company has two divisions. Spartan Division, which has operating assets of $80,000,000 produces and sells 900,000 units of a product at a market price of $140 per unit. Variable costs total $40 per unit. The division also assigns $70 of fixed costs to each unit based on total capacity of 1,000,000 units.
Trojan Division wants to purchase 200,000 units from Spartan. However, it is only willing to pay $80 per unit because it has an opportunity to accept a special order at a reduced price. The order is economically justifiable only if Trojan Division can acquire Spartan Division’s output at a reduced price.
Athena Company’s cost of capital is 15%.
Required:
a) What is the ROI for Spartan Division without the transfer to Trojan Division?
b) What is Spartan Division’s ROI if it transfers 200,000 units to Trojan Division at $80 each?
c) What is the minimum transfer price for the 200,000-unit order that Spartan would accept if it were willing to maintain the same ROI with the transfer as it would accept by selling its 900,000 units to the outside market?
d) What is the sales revenue at this transfer price?
e) What is the residual income for Spartan Division without the transfer to Trojan Division?
f) What is Spartan Division’s residual income if it transfers 200,000 units to Trojan Division at $80 each?
g) What is the minimum transfer price for the 200,000-unit order that Spartan would accept if it were willing to maintain the same residual income with the transfer as it would accept by selling its 900,000 units to the outside market?
h) If Spartan Division had no capacity constraints, what is the minimum transfer price it could accept on the order from Trojan Division? Explain your answer.
i) If Spartan Division could sell all units produced to the outside market, what transfer price would you recommend? Why?
Explanation / Answer
a)
ROI for Spartan Division without the transfer to Trojan Division is calculated as under:
b)
Spartan Division’s ROI if it transfers 200,000 units to Trojan Division at $80 each is calculated as under:
c)
Minimum transfer price for the 200,000-unit order that Spartan would accept if it were willing to maintain the same ROI with the transfer as it would accept by selling its 900,000 units to the outside market is $140.
d)
Sales revenue at this transfer price is 200,000*140 = $28,000,000 for the 200,000 units transferred to Trojan Division and $98,000,000 for units sold in external market.
Particulars Amount ($) Sale Revenue 126000000 Less: Cost of goods sold 36000000 Gross margin 90000000 Fixed Costs (1,000,000*70) 70000000 Net profit 20000000 Average Operating assets 800,00,000 ROI= Net Income/ Average operating assets 25%Related Questions
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