Question

) Division A of Gwinnett Company, produces wedges. Division Z’s manager has discretion in pricing and other decisions. Division Z is expected to generate a minimum required rate of return of at least 18% on its operating assets. The division has average operating assets of $900,000. The wedges are sold for $8 each. Variable costs are $3 per wedges, and fixed costs total $390,000 per year. The division has a capacity of 120,000 wedges each year.

1. How many wedges must Division Z sell each year to generate the desired rate of return on its assets? (10 points)

                                                                                    Number of wedges: ___________  

B) Assume that Division Z’s current ROI equals the minimum required rate of 18%. The divisional manager wants to increase the selling price per wedge by 5%. Market studies indicate that an increase in the selling price would cause sales to drop by 15,000 units each year. However, operating assets could be reduced by $65,000 due to decreased needs for accounts receivable and inventory. Compute the new ROI if these changes are made. (9 points)

                                                                               ROI: __________

C) Refer to the original data (i.e. used for question A.). Assume again that the Division’s current ROI equals the required rate of 18%. Rather than increase the selling price, the sales manager want to reduced the selling price by 10%. Market studies indicate that this would fill the plant to capacity. In order to carry the greater level of sales, however, operating assets would increase by $28,000. Compute ROI if these changes are made. (9 points)

Please answer part C of this question!

Answer 1

	No. of units actually produced =120,000 units
	Selling price per unit =$8
	Total Sales =120,000 units*$7.20 =$864,000
Less:	Variable costs =120,000 units*$3 =$360,000
	Contribution margin =$504,000
Less:	Fixed costs =$390,000
	Net operating income =$114,000
	Average operating assets =$928,000
	ROI =Net operating income / Average operating assets
	ROI =$114,000 / $928,000 =12.28%