Duval Inc. uses only equity capital, and it has two equally-sized divisions. Division A's cost of capital is 10.0%, Division B's
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<u>Solution and Explanation:</u>
<u> Part A </u>- Inflatable divisions's Current Return on Investment = Yearly Earnings / Investment Cost * 100
There the Inflatable Division is Currently Earning $ 250,000 annually from an Asset base of $ 1,250,000
Therefore, ROI =
<u>Part B - </u>Let the maximum variable cost be X.
Given that - 1. Selling Price per Unit = $10 , 2. No of Units to be produced = 40000 , 3. Annual Fixed Cost = $ 140000
Therefore , ROI = Current Earning + New Earning / Current Assets + New Assets
20% =
Solve for X getting, X = 6
Therefore maximum variable cost it can incur without change in current ROI is $ 6 per unit
Resulting Contribution Margin per Unit = SP - VC = $10 minus $6 = $4 per unit
<u> part C -</u> Minimum Transfer Lightning division Should charge
Given Information - Capacity of Lightning division is 150000 units and Utilized capacity is 135000 units. Therefore Spare capacity is 15000 units .Also Market Price of Product of Lightning division is $ 5 and Variable cost is $3 per unit.
So for the First 15000 units of Requirement of Inflatable division - Transfer Price should be Variable cost i.e $ 3 per unit because Lightning division has spare capacity in this.
For the next 25000 units of requirement of Inflatable division - Transfer Price should be Market Price i.e $ 5 per unit as Lightning division has to reduce is external sale.
Therefore Minimum TP = 1 per Unit
<u>Part D - </u>No, Here Tiny offers to transfer $4 ( $6 - $2 ) per unit to Lightning division. However the minimum TP Lightning should get is 4.25 per unit and if less than this TP is offered by Tiny it will lead to loss in the Lightning Division.