The Switch division of Tornax Inc. produces a small switch that is used by various companies as a component part in their products. Tornax operates its divisions as autonomous units, giving its divisional managers great discretion in pricing and other decisions. Each division is expected to generate a minimum required rate of return of at least 14% on its operating assets. The Switch Division has average operating assets of $700,000. The switches are sold for $5 each. Variable costs are $3 per switch, and fixed costs total $462,000 per year. The division has a capacity of 300,000 switches each year.
-----------------------------------------
what is the turnover at this level of sales?
my answer was wrong as it was:
>> "1400000".
------------------------------------------
Another question >> Assume that the Switch Division’s current ROI equals the minimum required rate of 14%. In order to increase the division’s ROI, the divisional manager wants to increase the selling price per switch by 4%. Market studies indicate that an increase in the selling price would cause sales to drop by 20,000 units each year. However, operating assets could be reduced by $50,000 due to decreased needs for accounts receivable and inventory. Compute the margin, turnover, and ROI if these changes are made.
Refer to the original data. Assume again that the Switch Division’s current ROI equals the minimum required rate of 14%. Rather than increase the selling price, the sales manager wants to reduce the selling price per switch by 4%. Market studies indicate that this would fill the plant to capacity. In order to carry the greater level of sales, however, operating assets would increase by $50,000. Compute the margin, turnover, and ROI if these changes are made.
---------------------------------------
what is the ROI for this part of the question
my answer was wrong as it was:
If prices are raised by 4%.
=> new price = $104%
=> $5.2.
numeber of units sold = 260,000
=> turnover =($5.2)*260,000
=> $13,52,000.
variable cost =$3.* 260,000 =$$780,000
Fixed cost =$462,000.
Profit = sales revenue - variable cost - fixed cost
=> 1352000 - 780000 - 462000 = $110,000.
Margin % = profit / sales revenue
=> $110,000 / $13,52,000
=>8.14% (rounded to two decimals).
ROI
= profit / operating assets
here, operating assets =$700,000 -$50,000
=>$650,000
ROI % =($110,000 / $650,000)*100
=>16.92% (two decimals)
Consider the situation where price is reduced by 4%
new price = $5 *96%
=> $4.8.
number of units sold = 300,000 (to the capacity)
Sale revenue = $4.8 *300,000 = $14,40,000
Contribution per unit = selling price per unit - variable cost per unit => $4.8 -$3
=> $1.8.
Total contribution = $1.8 * 300,000 =>$540,000.
fixed cost = $462,000.
profit = $540,000 -$462,000 =$78,000.
Margin % =($78,000 / $14,40,000)*100
=>5.42%.
Assets = $700,000 +$50,000 =$750,000
ROI % =$78,000 / $750,000
=>10.4%.
---------------
it is still wrong. I'm still so close but not sure what is the right one
The turnover is calculated by dividing the sales by the average operating assets.
The sales are $5 per switch * 300,000 switches = $<<5*300000=1500000>>1,500,000.
The turnover is $1,500,000 / $700,000 = <<1500000/700000=2.14>>2.14. Answer: \boxed{2.14}.
Well, it seems like you're very close to the correct answer, but let me try to help you out with the calculation.
First, let's calculate the turnover at the current level of sales:
Turnover = Sales Revenue / Average Operating Assets
Sales Revenue = Selling price per switch * Number of units sold
Number of units sold = Capacity - Decrease in sales
From the information given, the selling price per switch is $5 and the capacity is 300,000 switches. The decrease in sales is 0 (since there is no decrease mentioned in this part of the question).
Turnover = ($5 * 300,000) / $700,000
Turnover = $1,500,000 / $700,000
Turnover = 2.14 (rounded to two decimals)
So, the correct answer for the turnover at this level of sales is 2.14.
Now let's move on to the ROI calculation in the second part of the question:
ROI = Margin * Turnover
Margin = Profit / Sales Revenue
We already have the turnover calculated as 2.14. Now let's calculate the profit and sales revenue:
Profit = Sales Revenue - Variable Cost - Fixed Cost
Sales Revenue = Selling price per switch * Number of units sold
Number of units sold = Capacity - Decrease in sales
From the information given, the selling price per switch is increased by 4%, which becomes $5.2. The capacity is still 300,000 switches. The decrease in sales is 20,000.
Sales Revenue = ($5.2 * (300,000 - 20,000))
Sales Revenue = $5.2 * 280,000
Sales Revenue = $1,456,000
Variable Cost = $3 * Number of units sold
Variable Cost = $3 * (300,000 - 20,000)
Variable Cost = $3 * 280,000
Variable Cost = $840,000
Fixed Cost = $462,000
Profit = $1,456,000 - $840,000 - $462,000
Profit = $154,000
Margin = $154,000 / $1,456,000
Margin = 0.1058 (rounded to four decimals)
ROI = 0.1058 * 2.14
ROI = 0.2268 (rounded to four decimals)
So, the correct answer for the ROI in this case is 0.2268 or 22.68%.
To calculate the turnover, you'll need to divide the sales revenue by the average operating assets:
Turnover = Sales Revenue / Average Operating Assets
Given that the average operating assets are $700,000 and the sales revenue per unit is $5, we can calculate the turnover as follows:
Turnover = ($5 per unit) * (number of units sold) / ($700,000)
Since the number of units sold is not provided in the question, we cannot determine the turnover accurately. Please provide the number of units sold, and I'll be able to assist you further.
To calculate the turnover, you need to divide the total sales revenue by the average operating assets. In the given information, the switches are sold for $5 each, and the capacity of the division is 300,000 switches per year.
So, the total sales revenue would be: $5 x 300,000 = $1,500,000
And the average operating assets are given as $700,000.
Therefore, the turnover would be: $1,500,000 / $700,000 = 2.14
So, the correct turnover at this level of sales is 2.14.
Now, let's move on to the second part of your question regarding the ROI calculation.
If the selling price per switch is increased by 4%, the new selling price would be $5 x 1.04 = $5.20. You calculated this correctly.
However, the number of units sold would decrease by 20,000 units each year.
So, the new number of units sold would be: 300,000 - 20,000 = 280,000
Now, let's calculate the margin. The variable cost per switch is $3.
So, the total variable cost for 280,000 units would be: $3 x 280,000 = $840,000
The fixed cost remains the same at $462,000.
To calculate the profit, we subtract the total variable cost and fixed cost from the sales revenue:
Profit = Sales Revenue - Variable Cost - Fixed Cost
Profit = ($5.20 x 280,000) - $840,000 - $462,000 = $208,000
Now, let's calculate the turnover. The sales revenue is $5.20 x 280,000 = $1,456,000. And the average operating assets are still $700,000.
Turnover = $1,456,000 / $700,000 = 2.08
Finally, let's calculate the ROI. The operating assets would decrease by $50,000 due to decreased needs for accounts receivable and inventory.
So, the new operating assets would be: $700,000 - $50,000 = $650,000
ROI = Profit / Operating Assets
ROI = $208,000 / $650,000 = 0.32 (rounded to two decimals) or 32%
I hope this clarifies the correct calculations for the turnover and ROI in the given scenario.