Thompson Manufacturing has been in business for over 50 years, making a variety of consumer electronics products. Mary Felix recently joined the business as vice president of the Conley division, one of the companys newest divisions. During her first week on the job, Mary met with CEO Mitch Thompson to discuss the divisions future. I know were one of the newest and smallest divisions in the company, Mary said, but I think were in a position to realize some dramatic growth through product line expansion. Weve got a full pipeline of products under development, and Id like to speed up development of a couple of those products. If we work hard, I think we can have the new express charger ready for release by the end of the year. Mitch thought for a minute and then replied. That sounds like a good idea, Mary. I just dont want you to move so fast that you dont have a good understanding of how the introduction of the new product will affect the divisions performance. Remember, Im a big fan of maintaining our return on investment. Mary went back to her office after the meeting and began to review the express charger. At a sales price of $10 per unit, the marketing department estimates demand for the product at 50,000 units. The division will need to purchase a new machine for $100,000 to produce the charger. Mary also estimates that the division will incur an additional $150,000 in fixed costs that are directly attributable to the charger. One component of the charger is currently produced by Thompsons Amber division at a variable cost of $4 per unit. The component is sold to outside customers for $6 per unit. Mary had met with Caroline Smith, vice president of the Amber division, earlier in the week to discuss the possibility of the Amber division supplying the component to the Conley Division. Sure, Caroline began, Id like to help you out on this. We can provide the components at our market price of $6 per unit. We have the capacity to make 150,000 of the components, and were currently making only 130,000 for our external customers.Mary thanked Caroline for her time saying, Ill get back to you next week. The Conley division currently earns $250,000 on $2.5 million in sales revenue. The division has an asset base of $1,250,000. Mary knows that Mitch will not be happy if the new product reduces the divisions return on investment, and she is concerned that Carolines offer to sell the component at $6 per unit will push product costs too high to maintain the divisions ROI. She thinks that if she can meet with Caroline again to explain the situation, maybe she can negotiate a lower transfer price.

(a)

What is the Conley divisions current return on investment?

Return on Investment

20 %

(b)

Given the projected demand for the charger and the current cost estimates for the product, what is the maximum total variable cost that Mary can incur and still maintain the divisions ROI?

Total Maximum Variable Cost

$enter the total maximum variable cost in dollars

What would be the resulting contribution margin per unit for the charger? (Round answer to 2 decimal places, e.g. 52.75.)

Contribution Margin

$enter the contribution margin per unit in dollars rounded to 2 decimal places per unit