Question

In: Accounting

Division A of a firm produces a single product, which is sold only to Division B....

Division A of a firm produces a single product, which is sold only to Division B. Division A has a total investment of $1,000,000, while Division B has a total investment of $2,000,000. Division A annually sells 100,000 units of its product to Division B for $5 per unit and earns $150,000 in operating profit. Division B currently earns $250,000. If Division A raises its selling price to $6 per unit and nothing else changes:

a) The firm's overall ROI will rise

b) The firm's overall ROI will fall

c) Division A's ROI will increase to 20%

d) The firm's overall ROI will remain unchanged

Solutions

Expert Solution

Since as per the given question - Division A sells its product to Division B only. ( No information on other sales other than Division B available).

Operating Profit of Division A when selling 100,000 units to Division B for $5 per unit = $150,000

Increase in profit of Division A when selling 100,000 unit to Division B for $6 per unit = $150,000 + [100,000 units * ($6-$5)] = $250,000

Current Profit of Division B = $250,000

Decrease in profit of Division B after increase in selling price by Division A for its product = $250,000 - [100,000 unit * ($6-$5)] = $150,000

ROI = Profits of the Company / Total Investment of the company

Current ROI of the Firm = ($150,000 + $250,000) / ($1,000,000 + $2,000,000) = 13%

There is an increase in the selling price of the product for Division A

Updated ROI of the firm = Updated Profits of the Divisions / Total Investment

= ($250,000 + $150,000) / ($1,000,000 + $2,000,000) = 13%

There is no change in the ROI of the firm, The answer to the question is option d -  The firm's overall ROI will remain unchanged

ekkarill92 answered 1 year ago
Next > < Previous

Related Solutions

Company ABC produces a single product. This year the company produced 20,000 units but only sold...
Company ABC produces a single product. This year the company produced 20,000 units but only sold 15,000 units at the price of $40 each. Variable manufacturing costs (including direct materials, director labor, and variable manufacturing overhead) total $10 per unit. Variable selling and administrative cost is $5 per unit. Fixed manufacturing overhead cost is $100,000 each year. Fixed selling and administrative cost is $120,000 each year. There is no inventory at the beginning of this year. What is the net...
Company ABC produces a single product. This year the company produced 20,000 units but only sold...
Company ABC produces a single product. This year the company produced 20,000 units but only sold 15,000 units at the price of $40 each. Variable manufacturing costs (including direct materials, director labor, and variable manufacturing overhead) total $10 per unit. Variable selling and administrative cost is $5 per unit. Fixed manufacturing overhead cost is $100,000 each year. Fixed selling and administrative cost is $120,000 each year. There is no inventory at the beginning of this year. What is the net...
Company ABC produces a single product. This year the company produced 20,000 units but only sold...
Company ABC produces a single product. This year the company produced 20,000 units but only sold 15,000 units at the price of $40 each. Variable manufacturing costs (including direct materials, director labor, and variable manufacturing overhead) total $10 per unit. Variable selling and administrative cost is $5 per unit. Fixed manufacturing overhead cost is $100,000 each year. Fixed selling and administrative cost is $100,000 each year. There is no inventory at the beginning of this year. Required - What is...
Assume that Division A has has a product that can be sold either to Division B...
Assume that Division A has has a product that can be sold either to Division B of the same company or to outside customers. The manager of both division are evaluated based on their own divisions return on investment. The manager are free to decide if they will participate in any internal transfers. Division A Capacity in units = 300,000 Number of units now being sold out to outside customers = 300,000 Selling price per unit on the outside market...
Assume that Division A has has a product that can be sold either to Division B...
Assume that Division A has has a product that can be sold either to Division B of the same company or to outside customers. The manager of both division are evaluated based on their own divisions return on investment. The manager are free to decide if they will participate in any internal transfers. Division A Capacity in units = 100,000 Number of units now being sold out to outside customers = 750,000 Selling price per unit on the outside market...
The supplying division of a company produces a component which is sold to the company's buying...
The supplying division of a company produces a component which is sold to the company's buying division and to external customers. The supplying division has incremental costs of $40 per unit and can sell the component to its external customers for $75. The buying division can purchase a similar component from an external supplier for $80. Which of the following is TRUE regarding Transfer Prices? 1. Assuming the supplying division has no excess capacity, the minimum amount it would charge...
The Zee manufacturing company produces a single product which goes through one process only. The manufacturing...
The Zee manufacturing company produces a single product which goes through one process only. The manufacturing cycle takes a month. The company started its manufacturing operation on 1st February, 2018 and costs of production for this month were as follows: Material Rs. 41,412 Labor Rs. 32,054 FOH Rs. 23,870 The production statistics for the month were as follow: Units completed and transfer to finished goods store Rs. 6,500 Unit in Process on February 31, 2018 was 1,600 (Material 40%, Labor...
The Pole Division produces poles which can be sold to outside customers or transferred to the...
The Pole Division produces poles which can be sold to outside customers or transferred to the Flag Division. The following data are available for last year's activities in the Pole Division: Capacity in units                     400,000 poles Outside demand                      380,000 poles Demand by Flag Division         25,000 poles Selling price                               $5.00 Variable cost                              $2.75 Total fixed costs                     $200,000    On a transfer to the Flag Division, the Pole Division can save $0.65 of the variable costs per unit transferred.  HINT: Figure out the opportuning cost for the 5,000...
The Central Valley Company is a manufacturing firm that produces and sells a single product. The...
The Central Valley Company is a manufacturing firm that produces and sells a single product. The company’s revenues and expenses for the last four months are given below. Central Valley Company Comparative Monthly Income Statements March April May June Sales in units 6,800 6,300 7,050 7,300 Sales revenue $ 829,600 $ 768,600 $ 860,100 $ 890,600 Less: Cost of goods sold 418,500 393,000 426,250 444,000 Gross margin 411,100 375,600 433,850 446,600 Less: Operating expenses Shipping expense 76,000 71,000 79,250 80,000...
The Central Valley Company is a manufacturing firm that produces and sells a single product. The...
The Central Valley Company is a manufacturing firm that produces and sells a single product. The company’s revenues and expenses for the last four months are given below. Central Valley Company Comparative Income Statement March April May June   Sales in units 5,800 5,300 6,450 7,600   Sales revenue $ 742,400 $ 678,400 $ 825,600 $ 972,800 Less: Cost of goods sold 392,200 366,336 429,312 496,128 Gross margin $ 350,200 $ 312,064 $ 396,288 $ 476,672 Less: Operating Expenses            Shipping expense...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT