Task: Consider the following data regarding budgeted operations for 20X7 of the Portland division of Machine Products:
Average total assets
Receivables $220,000
Inventories 290,000
Plant and equipment, net 450,000
Total $960,000
Fixed overhead $300,000
Variable Costs $1 per unit
Desired rate o return on average total assets 25%
Expected volume 150,000 units
Question 1.
a. What average unit sales price does the Portland division need to obtain its desired rate of return on average total assets:
b. What would be the expected capital turnover?
c. What would be the return on sales?
Question 2.
a. If the selling price is as previously computed, what rate of return will the division earn on total assets if sales volume is 170,000 units?
b. If sales volume is 130,000 units?
Question 3. Assume that the Portland division plans to sell 45,000 units to the Calgary division of Machine Products and that it can sell only 105,000 units to outside customers at the price computed in requirement 1a. The Calgary division manager has balked at a tentative transfer price of $4. She has offered $2.25, claiming that she can manufacture the units herself for that price. The Portland division manager has examined his own data. He had decided that he could eliminate $60,000 of inventories, $90,000 of plant and equipment, and $22, 500 of fixed overhead if he did not sell to the Calgary division and sold only 105,000 units to outside customers.
Should he sell for $2.25? Show computations to support your answer.