Athena Company has two divisions. Spartan Division, which has an investment base of $8,400,000, produces and sells 450,000 units of a product at a market price of $28 per unit. Its variable costs total $8 per unit. The division also charges each unit $14 of fixed costs based on a capacity of 500,000 units.
Trojan Division wants to purchase 100,000 units from Spartan. However, it is willing to pay only $16 per unit because it has an opportunity to accept a special order at a reduced price. The order is economically justifiable only if Trojan can acquire Spartan's output at a reduced price. Division managers are evaluated using residual income using a 15 percent cost of capital.
Required (Please show work:
(a)What is the residual income for Spartan without the transfer to Trojan? (Omit the "$" sign in your response.)
Residual income $_____
(b) What is Spartan's residual income if it transfers 100,000 units to Trojan at $16 each? (Omit the "$" sign in your response.)
Residual income $_____
(c) What is the minimum transfer price for the 100,000-unit order that Spartan would accept if it were willing to maintain the same residual income with the transfer as it would accept by selling its 450,000 units to the outside market? (Omit the "$" sign in your response.)