The Division A of Standard Products is planning its 2014 operating budget. Avera
ID: 2456721 • Letter: T
Question
The Division A of Standard Products is planning its 2014 operating budget. Average operating assets of $1,500,000 will be used during in the division during the year and per-unit selling prices are expected to average $100. Variable costs of the division are budgeted at $400,000, while fixed costs are set at $250,000. The company's required rate of return for purposes of calculating residual income (RI) is 18%.
a. What is the sales volume (in units) necessary for Division A to achieve a 20% ROI in 2014?
The division manager receives a bonus of 50% of residual income (RI). What is his anticipated bonus for 2014 for the division manager, assuming she achieves the 20% ROI target specified in requirement (a)?
Explanation / Answer
As per question, the Division A of Standard Products is planning its 2014 operating budget.
=> Average operating assets of $1,500,000 will be used during in the division during the year
=> Per-unit selling prices are expected to average $100
=> Variable costs of the division are budgeted at $400,000
=> Fixed costs are set at $250,000.
=> The company's present Required rate of return for purposes of calculating residual income (RI) is 18%.
Now, Division A to achieve a 20% ROI in 2014,
(a) The sales volume (in units) necessary for to achieve 20% ROI IN 2014 is:
required rate of return = $1500000 * 20 % = $300,000= Residual Income
Total Sales for the year 2014 = Residual Income + Fixed Costs + Variable Costs
=[ $300,000 + $250,000 + {($400,000 / 9200)*X}] /100 =X
=( $550,000 + 43.478 X)/100 = X
X = $550000 / 56.522 = 9731 units = Sales Volume in Units to achieve 20% ROI
=> The total sales at 20% ROI = 9731 * $100 =$ 973,100
b) The residual income at 20% ROI = $300,000, 50% bonus to the division manager is $150,000 for 2014 on achievement of 20% ROI.
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