Solano Company has sales of $780,000, cost of goods sold of $510,000, other operating expenses of $38,000, average invested assets of $2,300,000, and a hurdle rate of 12 percent.

Required:

1.Determine Solano's return on investment (ROI), investment turnover, profit margin, and residual income.

2.Several possible changes that Solano could face in the upcoming year follow. Determine each scenario's impact on Solano's ROI and residual income. (Note:Treat each scenario independently.)

a.Company sales and cost of goods sold increase by 30 percent.

b.Operating expenses decrease by $12,000.

c.Operating expenses increase by 10 percent.

d.Average invested assets increase by $440,000.

e.Solano changes its hurdle rate to 18 percent.

The Molding Division of Cotwold Company manufactures a plastic casing used by the Assembly Division. This casing is also sold to external customers for $41 per unit. Variable costs for the casing are $28 per unit and fixed cost is $6 per unit. Cotwold executives would like for the Molding Division to transfer 24,000 units to the Assembly Division at a price of $35 per unit.

Assume the Molding Division is operating at full capacity.

Required:

1.Should it accept the transfer price proposed by management?

Yes/no

2.Identify the minimum transfer price that the Molding Division will accept.

Minimum transfer price $

The Molding Division of Cotwold Company manufactures a plastic casing used by the Assembly Division. This casing is also sold to external customers for $31 per unit. Variable costs for the casing are $18 per unit and fixed cost is $4 per unit. Cotwold executives would like for the Molding Division to transfer 14,000 units to the Assembly Division at a price of $21 per unit. Assume that the Molding Division has enough excess capacity to accommodate the request.

Required:

1.Should the Molding Division accept the $21 transfer price proposed by management?

multiple choice

• Yes
• No

2.Calculate the effect on the Molding Division's net income if it accepts the $21 transfer price.

The Molding Division of Cotwold Company manufactures a plastic casing used by the Assembly Division. This casing is also sold to external customers for $28 per unit. Variable costs for the casing are $12 per unit and fixed cost is $3 per unit. Cotwold executives would like for the Molding Division to transfer 11,000 units to the Assembly Division at a price of $22 per unit. Assume that the Molding Division has excess capacity, but the Assembly Division requires the casing to be made from a specific blend of plastics. This would raise the variable cost per unit to $23.

Required:

1.Should the Molding Division accept the $22 transfer price proposed by management?

2.Determine the minimum transfer price that it will accept.

3.Determine the mutually beneficial transfer price so that the two divisions equally split the profits from the transfer.