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Nova Company Has Two Divisions: OPA Division and LPA Division

question 46

Multiple Choice

Nova Company has two divisions: OPA Division and LPA Division. The OPA Division manufactures a single product, presently operates at 95 per cent of full capacity (100 000 units) and can sell all 95 000 units produced to outside customers. This product is also a component used in a product made by the LPA Division. OPA's full cost of production is $22.50 per unit, including $4.50 of applied fixed overhead costs. The applied fixed overhead is calculated based upon production of 95 000 units. OPA's management believes that production can be raised to 100 000 units without affecting cost behaviour. OPA's selling price per unit is $30 with a 10 per cent sales commission on outside sales. LPA is presently negotiating the purchase of units from OPA. LPA can purchase a comparable component outside for $29.
What is the minimum acceptable transfer price for the first 5000 units from the viewpoint of OPA's management?

Recognize the Uniform Commercial Code (UCC)'s role and its application to sales, leases, and contractual remedies.

Identify and understand the remedies available under the UCC for breaches of contract.

Understand the concept of "cover" and its implications for buyers or lessees in a sales or lease agreement.

Grasp the importance of liquidated damages and the limitations on their use in contracts.

Definitions:

Market Risk Premium

The additional return expected by investors for taking on the higher risk of investing in the stock market over a risk-free asset.

Dividend Growth

The rate at which a company's dividend payments increase over time, often used as an indicator of financial health and future performance.

Weighted Average Cost of Capital (WACC)

An estimation of a company's capital cost where each type of capital is weighted according to its proportion.

Dividend Growth Rate

The annualized percentage rate of growth of a company's dividend payments to shareholders.