Pricing and return on investment.
Salvador SA assembles motorcycles and uses long-run (defined as 3-5 years) average demand to set the budgeted production level and costs for pricing. Prices are then adjusted only for large changes in assembly wage rates or direct materials prices. You are given the following data:
Direct materials, assembly wages and other variable costs €1320 per unit Fixed costs €300 000 000 per year
Target return on investment 20%
Normal utilisation of capacity (average output) 1 000 000 units
Investment (total assets) €900 000 000
Required
1. What operating profit percentage on revenues is needed to attain the target return on investment of 20%? What is the selling price per unit?
2. Using the selling price per unit calculated in requirement 1, what rate of return on investment will be earned if Salvador assembles and sells 1 500 000 units? 500 000 units?
3. The company has a management bonus plan based on yearly division performance. Assume that Salvador assembled and sold 1 000 000 units, 1 500 000 units and 500 000 units in three successive years. Each of three people served as divisional manager for one year before being killed in a car accident. As the principal heir of the third manager, comment on the bonus plan.