Oxford Company has two divisions. Thames Division, which has aninvestment base of $81,000,000, produces and sells 910,000 units ofa product at a market price of $149 per unit. Its variable coststotal $40 per unit. The division also charges each unit $71 offixed costs based on a capacity of 1,000,000 units.
Lakes Division wants to purchase 260,000 units from Thames.However, it is willing to pay only $82 per unit because it has anopportunity to accept a special order at a reduced price. The orderis economically justifiable only if Lakes can acquire Thames’output at a reduced price.
Division managers are evaluated using residual income using a 12percent cost of capital
Required:
a. What is the residual income for Thameswithout the transfer to Lakes?
residual income
b. What is Thames’s residual income if ittransfers 260,000 units to Lakes at $82 each?
residual income
c. What is the minimum transfer price for the260,000-unit order that Thames would accept if it were willing tomaintain the same residual income with the transfer as it wouldaccept by selling its 910,000 units to the outside market?(Round your answer to 2 decimal places.)
minimum transfer price
