Problem 4: Performance Evaluation (28 points total)

A) Division A of Gwinnett Company, produces wedges. Division Zs manager has discretion in pricing and other decisions. Division Z is expected to generate a minimum required rate of return of at least 18% on its operating assets. The division has average operating assets of $900,000. The wedges are sold for $8 each. Variable costs are $3 per wedges, and fixed costs total $390,000 per year. The division has a capacity of 120,000 wedges each year.

1. How many wedges must Division Z sell each year to generate the desired rate of return on its assets? (10 points)

Number of wedges: ___________

B) Assume that Division Zs current ROI equals the minimum required rate of 18%. The divisional manager wants to increase the selling price per wedge by 5%. Market studies indicate that an increase in the selling price would cause sales to drop by 15,000 units each year. However, operating assets could be reduced by $65,000 due to decreased needs for accounts receivable and inventory. Compute the new ROI if these changes are made. (9 points)

ROI: __________

Please answer Question B!