Zear Company produces an electronic processor and sells it wholesale to manufacturing and retail outlets at $10 each. In Zear’s Year 8 fiscal period, it sold 500,000 processors. Fixed costs for Year 8 total $1,500,000, including interest costs on its 7.5% debentures. Variable costs are $4 per processor for materials. Zear employs about 20 hourly paid plant employees, each earning $35,000 in Year 8.

Zear is currently confronting labor negotiations. The plant employees are requesting substantial increases in hourly wages. Zear forecasts a 6% increase in fixed costs and no change in either the processor’s price or in material costs for the processors. Zear also forecasts a 10% growth in sales volume for Year 9. To meet the necessary increase in production due to sales demand, Zear recently hired two additional hourly plant employees.

The condensed balance sheet for Zear at the end of fiscal Year 8 follows (the tax rate is 50%):

Required:
a. Compute Zear’s return on invested capital for Year 8 where invested capital is:
(1) Net operating assets at end of Year 8 (assume all assets and current liabilities are operating).
(2) Common equity capital at end of Year 8.
b. Calculate the maximum annual wage increase Zear can pay each plant employee and show a 10% return on net operatingassets.

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Assets Liabilities and equity Current liabilities 6% preferred stock, 10,000 shares, Current assets $2,000,000 Cash Receivables... Other 1,000,000 Total current assets Fixed assets (net) . Total assets.... 800,000 $100 par value 2,500,000 Common stock. 5500,000 Retained earnings $8,000,000 Total liabilities and equity 1,000,000 1,800,000 1,200,000 .$8,000,000