Question

Problem 4: Performance Evaluation (28 points total)

A) 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: __________

Please answer Question B!

Answer 1

	No. of wedges sold	110400	units
	No. of units sold after decrease	95400	units
	Selling price per unit	$7.60
Less:	Variable cost per unit	$3.00
	Contribution margin per unit	$4.60
	Contribution margin(95400 units*$4.60)	$4,38,840
Less:	Fixed Costs	$3,90,000
	Net operating income	$48,840
	Average operating assets	$8,35,000
	ROI =Net operating income / Average operating assets	5.85%