ROI and residual profit.
Récré-Gaules SARL produces and distributes a wide variety of recreational products. One of its divisions, the Idefix Division, manufactures and sells 'menhirs', which are very popular with cross-country skiers. The demand for these menhirs is relatively insensitive to price changes. The Idefix Division is considered to be an investment centre and in recent years has averaged a return on investment of 20%. The following data are available for the Idefix Division and its product:
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Total annual fixed costs
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€1 000 000
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Variable costs per menhir
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€300
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Average number of menhirs sold each year
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10 000
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Average operating assets invested in the division
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€1 600 000
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Required
1 What is the minimum selling price per unit that the Idefix Division could charge in order for Marie-Aimée Obelix, the division manager, to get a favourable performance rating? Management considers an ROI below 20% to be unfavourable.
2 Assume that Récré-Gaules judges the performance of its investment centre managers on the basis of residual income rather than ROI, as was assumed in requirement 1. The company's required rate of return is considered to be 15%. What is the minimum selling price per unit that the Idefix Division should charge for Obelix to receive a favourable performance rating?