Question

Tiny went back to his office after the meeting and began to crunch the numbers on the rapid inflator. At a price of $10 per u

Required: 1. What is the Inflatable Divisions current return on investment? 2. Given the projected demand for the inflator a

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Answer #1

Answer to Part A -

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 = 250000 / 1250000*100 = 20%

Answer to Part B -

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% = 250000+ [ (10-X) * 40000 - 140000 ] / 1250000+100000

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-$6 = $4 per unit

Answer to part C -

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 = 15000*3 + 25000*5 / 40000 = $ 4.25 per Unit

Answer to Part D -

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.

> where is the answer for Part E and F please?

Mayalia Palaamo Wed, May 4, 2022 12:16 AM

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