ACME Inc. has current assets of $450,000 and capital assets of $630,000. Its budgeted production volume for the next fiscal year is 200,000 units. Fixed costs are projected at $400,000 and variable unit costs for the one product produced total $5/unit. The company defines ROI as Operating Income/Total Assets and its required rate of return is 14%.

Required:

1. What selling price should ACME Inc. charge for its product if it wishes to achieve a 25% ROI? What is the operating income at this price? (3 marks)

Answer:

1. The general manager for ACME Inc. receives a bonus equal to 12% of the residual income for the period. Calculate the amount of the bonus assuming the selling price calculated in part a). (2 marks)

Answer:

1. Explain in your own word's advantages and disadvantages of ROI and Residual Income. Include your recommendations for the most appropriate method for calculating the bonus. (5 marks)

Answer: