Calculate the minimum selling price per unit

Reference no: EM132758464

Fitness Ltd is a producer and distributor of fitness equipment. One of its divisions, the Boxing Division, manufactures and sells s kipping ropes used in boxing fitness training. Due to an increase in the popularity of 'Boxercise' the demand for the product is currently high. The Boxing Division is considered to be an investment centre and in recent years has averaged a return on investment of 20%.

The following data are available for the Boxing Division and its product:

Total annual fixed costs £15,000
Variable costs per skipping robe £4.00
Average number of skipping ropes sold each year 12,000
Average operating assets invested in the division £20,000

Problem a) Calculate the minimum selling price per unit that the Boxing Division could charge in order for the divisional manager, to achieve a return acceptable to the company. The company currently considers an ROI below 20% to be unfavourable.

Problem b) Assume that Fitness Ltd judges the performance of its investment centre managers on the basis of Residual Income rather than ROI, as was assumed in part a. The company's required rate of return is considered to be 10%. Compute the minimum selling price per unit that the Boxing Division should charge for the division to achieve a profit.

Problem c) Compare and contrast both methods of measuring divisional performance, making reference to your answers in a) and b).

Reference no: EM132758464

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