Required Compute the company\'s margin, turnover, and ROl for last year 2 The bo
ID: 2432110 • Letter: R
Question
Required Compute the company's margin, turnover, and ROl for last year 2 The board of directors of Bridger Inc. has set a minimum, required return of 20% what was the company's residual income last year? PROBLEM 11-19 Cost-Volume-Profit Analysis; Return on Investment ILO3, LO4 The Switch division of Tornax Inc. produces a small switch that is used by various companies as a component part in t heir products. Tornax operates its divisions as autonomous units giv- g its divisional managers great discretion in pricing and other decisions. Each division is expected to generate a mini The Switch Division has average operating assets of $700.000. The switches are sold for SS each. Variable costs are $3 per switch, and fixed costs total $462000 per year. The division has a capacity of 300.000 switches each year. mum) required rate of return of at least 14% on its operating assets. Required L How many switches must the Switch Division sell each year to generate the desired rate of return on its assets? a. What is the margin earned at this level of sales? b. What is the turnover at this level of sales?Explanation / Answer
Problem 11-19:
1. Desired return = $ 700,000 x 14% = $ 98,000.
Contribution margin reuired = $ 98,000 + $ 462,000 = $ 560,000
Number of switches to be sold to earn the desired return = $ 560,000 / $ ( 5 - 3) = 280,000 switches.
a. The margin earned at this level of sales = Net operating income / Sales = $ 98,000 / ( 280,000 x $ 5) = 0.07 or 7%.
b. Turnover at this level of sales = Sales / Average Operating Assets = $ 1,400,000 / $ 700,000 = 2 times.
2. Proposed selling price = $ 5 x 1.04 % = $ 5.20.
Expected sales volume = 280,000 units - 20,000 units = 260,000.
Expected sales revenue = 260,000 x $ 5.20 = $ 1,352,000.
Net operating income = 260,000 x $ ( 5.20 - 3.00) - $ 462,000 = $ 110,000.
Margin= $ 110,000 / $ 1,352,000 = 0.0814 or 8.14 %
Turnover = $ 1,352,000 / $ 650,000 = 2.08 times
ROI = $ 110,000 / $ 650,000 = 0.1692 or 16.92 %.
3. Proposed selling price = $ 4.80
Expected sales volume = 300,000
Expected sales revenue = 300,000 x $ 4.80 =
Net operating income = 300,000 x $ ( 4.80 - 3.00) - $ 462,000 = $ 78,000.
Margin = $ 78,000 / $ 1,440,000 = 5.42 %
Turnover = $ 1,440,000 / $ 750,000 = 1.92 times.
ROI = $ 78,000 / $ 750,000 = 10.40 %
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