Question
Jar Division of Handy, Inc. expects the following result for 2004: Unit sales 70,000 Unit selling price P10 Unit variable cost P4 Total fixed costs
Jar Division of Handy, Inc. expects the following result for 2004:
Unit sales 70,000
Unit selling price P10
Unit variable cost P4
Total fixed costs P300,000
Total investment P500,000
The minimum required ROI is 15 percent, and divisions are evaluated on residual income. A foreign customer has approached Jars manager with an offer to buy 10,000 units at P7 each. If Jar accepts the order, it would not lose any of the 70,000 units at the regular price. Accepting the order would increase fixed costs by P10,000 and investment by P40,000.
What is the minimum price that Jar could accept for the order and still maintain its expected residual income?
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