The Surf Company produces a wide variety of surfwear and surfing equipment. Its newest division, Skimboards, manufactures and sells a single product-ShoreSurf-a skimboard made with carbon fibre. The demand for the ShoreSurf is relatively insensitive to price changes. The following data are available for Skimboards, which is an investment centre for Surf Company: Total annual fixed costs $870,000. Variable cost per ShoreSurf $35.00. Number of ShoreSurf sold each year 75,000. Average operating assets invested in the division $690,000.
Required:1. Calculate Skimboards's ROI if the selling price of ShoreSurf is $49.50 per board.
2. If management requires an ROI of at least 15% from the division, what is the minimum selling price that the Surf Company should charge per ShoreSurf board?
3. Assume that Surf Company judges the performance of its investment centres on the basis of RI rather than ROI. What is the minimum selling price that Skimboards should charge per ShoreSurf if the company's required rate of return is 12% and a minimum residual income of $275,000 is expected?