Washburn Associates has two divisions. Western Division, which has an investment base of $50,000,000, produces and sells 1,400,000 units of a product at a market price of $60 per unit. Its variable costs total $25 per unit. The division also charges each unit $20 of fixed costs based on a capacity of 1,500,000 units.

Eastern Division wants to purchase 200,000 units from Western. However, it is willing to pay only $40 per unit because it has an opportunity to accept a special order at a reduced price. The order is economically justifiable only if Eastern can acquire Western’s output at a reduced price. 

Required

a. What is the ROI for Western without the transfer to Eastern?

b. What is Western’s ROI if it transfers 200,000 units to Eastern at $40 each?

c. What is the minimum transfer price for the 200,000-unit order that Western would accept if it were willing to maintain the same ROI with the transfer as it would earn by only selling its 1,400,000 units to the outside market?