Pricing and return on investment. Orilla Exhaust Systems Co. produces exhaust systems for SUVs that are assembled in vehicles manufactured by various customers in several car assem- bly plants located within 500 km. Orilla Exhaust Systems uses long-run (defined as three to five years) average demand to set the budgeted production level and costs for pricing. Prices are then adjusted only for large changes in production wage rates or direct materials prices. In the last budgeted period, direct materials assembly wages and other variable costs are $15.84 per exhaust system. The plant fixed costs are $3,600,000 per year and are prorated by the normal utilization of capacity (average output) of 1,000,000 exhaust systems. The investment (total net assets) is $20,000,000 and the minimum expected return on investment is 20%. REQUIRED 1. What operating income percentage on revenues is needed to attain the minimum expected (target) return on investment of 20%? What is the selling price per unit? 2. Using the selling price per unit calculated in requirement 1, what rate of return on invest- ment will be earned if Orilla Exhaust Systems assembles and sells 1,500,000 units? 500,000 units? 3. The company has a management bonus plan based on yearly division performance. Assume that Orilla Exhaust Systems assembled and sold 1,000,000, 1,500,000, and 500,000 units in three successive years. Each of three people served as division manager for one year before being killed in an automobile accident. As the principal heir of the third manager, comment on the bonus plan.

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