20.17*ROI and RI (D. Kleespie, adapted) OBJECTIVES 3,4 The Sports Equipment Comp

Question

20.17*ROI and RI (D. Kleespie, adapted) OBJECTIVES 3,4 The Sports Equipment Company produces a wide variety of sports equipment. Its newest division, Golf Technology, manufactures and sells a single product-AccuDriver, a golf club that uses global positioning satellite technology to improve the accuracy of golfers' shots. The demand for AccuDriver is relatively insensitive to price changes. The following data are available for Golf Technology, which is an investment centre for Sports Equipment: Total annual fixed costs Variable cost per AccuDriver Number of AccuDrivers sold each year Average operating assets invested in the division $26 000000 $600 170000 S46000000 REQUIRED 1. Calculate Sports Equipments's ROI if the selling price of AccuDrivers is $830 per club. 2. If management requires an ROI of at least 28% from the division, what is the minimum selling price that the Golf Technology Division should charge per AccuDriver club? 3. Assume that Sports Equipment judges the performance of its investment centres on the basis of RI rather than ROI. What is the minimum selling price that Sports Equipment should charge per AccuDriver if the company's required rate of return is 18%?

Explanation / Answer

(1).

ROI = 28.48%

Explanation;

Formula of ROI is as follow;

ROI = Operating income / Average Investment

Average investment is given = $46000000

Now, let’s calculate operating income;

Sales (170000 * $830)

$141100000

Less: Variable cost (170000 * $600)

($102000000)

Less: Fixed costs

($26000000)

Operating income

$13100000

Let’s put the values in above given formula;

ROI = $13100000 / $46000000

ROI = 28.48%

(2).

Minimum selling price = $828.71 (Approx.)

Explanation;

Soppose selling price = X

Now, let’s put this selling price in the equation of ROI;

ROI = (Sale – Fixed cost – Variable cost) / Average Investment

0.28 = (170000 X – $26000000 – $102000000) / $46000000

0.28 * $46000000 = 170000 X – $128000000

$12880000 = 170000 X – $128000000

X = $140880000 / 170000

X = $828.71 (Approx.)

(3).

Minimum selling price = $801.65 (Approx.)

Explanation;

Soppose selling price = X

Now, let’s put this selling price in the equation of RI;

RI = Operating income – Capital charge

Operating income = (170000 X – $26000000 – $102000000)

Operating income = 170000 X – $128000000

Capital charge ($46000000 * 0.18) = $8280000

Now’ let’s put these values in equation;

170000 X – $128000000 – $8280000 = $0

170000 X = $136280000

X = $136280000 / 170000

X = $801.65 (Approx.)

Sales (170000 * $830)

$141100000

Less: Variable cost (170000 * $600)

($102000000)

Less: Fixed costs

($26000000)

Operating income

$13100000

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