3. value: 3.63 points Problem 15-34 Transfer Pricing with imperfect Markets: ROI

Question

3. value: 3.63 points Problem 15-34 Transfer Pricing with imperfect Markets: ROI Evaluation Normal Costing (LO 15-2) Oxford Company has two divisions. Thames Division, which has an investment base of $81,800,000, produces and sells 1,350,000 units of a product at a market price of $148 per unit. Its variable costs total $38 per unit. The division also charges each unit $70 of fixed costs based on a capacity of 1,400,000 units Lakes Division wants to purchase 270,000 units from Thames. However, it is willing to pay only $141 per unit because it has an opportunity to accept a special order at a reduced price. The order is economically justifiable only if Lakes can acquire Thames' output at a reduced price. Required: a. What is the ROl for Thames without the transfer to Lakes? (Round your answer to 2 decimal places.) ROl

Explanation / Answer

Particulars Amount Sales 199800000 (1350000*148) Less: Variable cost 51300000 (1350000*38) Contribution 148500000 Less: Fixed cost 98000000 (1400000*70) Profit 50500000 Part (a) ROI without transfer to Lake 61.73% (50500000/81800000)*100 Part (b) Particulars Amount Regular Sales 167240000 (1130000*148) Add: Sale to Lake 38070000 (270000*141) Less: Variable cost 53200000 (1400000*38) Contribution 152110000 Less: Fixed cost 98000000 (1400000*70) Profit 54110000 ROI without transfer to Lake 66.15% (54110000/81800000)*100 Part (b) Minimum Transfer Price 108.65 (152110000/1400000)

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