The Division a of Standard Products Is Planning Its 2019

question 58

Essay

The Division A of Standard Products is planning its 2019 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%.

Required:
1. Compute the sales volume (in units) necessary for Division A to achieve a 20% ROI in 2019.
2. The division manager receives a bonus of 50% of residual income (RI). What is her anticipated bonus for 2019 for the division manager, assuming she achieves the 20% ROI target specified in part (1)?

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Definitions:

Firm

An organization or business entity that produces goods or provides services with the aim of earning profits for its owners or shareholders.

Variable Costs

Expenses that fluctuate in direct proportion to the volume of production or output.

Fixed Cost

Costs that do not vary with the level of production or sales, such as rent, salaries, or insurance.

Lawn-mowing

The action or process of cutting the grass of a lawn, typically using a lawn mower.