Division A of Gwinnett Company, produced 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.
a. How many wedges must Division Z sell each year to generate the desired rate of return on its assets?
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 reduces by $65,000 due to decreased needs for accounts receivable and inventory. Compute the new ROI if these changes are made.
c. Refer to the original date used in a. Assume again that the Division's current ROI equal the required rate of 18%. Rather than increase the selling price, the sales manager wants to reduce 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.