# Question

Consider the following data regarding budgeted operations for 20X7 of the Austin division of Texas Products:

Average total assets

Receivables ........ $ 220,000

Inventories .......... 290,000

Plant and equipment, net ..... 450,000

Total ............ $ 960,000

Fixed overhead ....... $ 300,000

Variable costs ...... $.72 per unit

Desired rate of return on average total assets 20%

Expected volume ........ 150,000 units

1. a. What average unit sales price does the Austin division need to obtain its desired rate of return on average total assets?

b. What would be the expected capital turnover?

c. What would be the return on sales?

2 . a. If the selling price is as previously computed, what rate of return will the division earn on total assets if sales volume is 170,000 units?

b. If sales volume is 130,000 units?

3. Assume that the Austin division plans to sell 45,000 units to the Galveston division of Texas Products and that it can sell only 105,000 units to outside customers at the price computed in requirement 1a. The Galveston division manager has balked at a tentative transfer price of $4. She has offered $2.25, claiming that she can manufacture the units herself for that price. The Austin division manager has examined his own data. He had decided that he could eliminate $60,000 of inventories, $90,000 of plant and equipment, and $22,500 of fixed overhead if he did not sell to the Galveston division and sold only 105,000 units to outside customers. Should the Austin division manager sell for $2.25? Show computations to support your answer.

Average total assets

Receivables ........ $ 220,000

Inventories .......... 290,000

Plant and equipment, net ..... 450,000

Total ............ $ 960,000

Fixed overhead ....... $ 300,000

Variable costs ...... $.72 per unit

Desired rate of return on average total assets 20%

Expected volume ........ 150,000 units

1. a. What average unit sales price does the Austin division need to obtain its desired rate of return on average total assets?

b. What would be the expected capital turnover?

c. What would be the return on sales?

2 . a. If the selling price is as previously computed, what rate of return will the division earn on total assets if sales volume is 170,000 units?

b. If sales volume is 130,000 units?

3. Assume that the Austin division plans to sell 45,000 units to the Galveston division of Texas Products and that it can sell only 105,000 units to outside customers at the price computed in requirement 1a. The Galveston division manager has balked at a tentative transfer price of $4. She has offered $2.25, claiming that she can manufacture the units herself for that price. The Austin division manager has examined his own data. He had decided that he could eliminate $60,000 of inventories, $90,000 of plant and equipment, and $22,500 of fixed overhead if he did not sell to the Galveston division and sold only 105,000 units to outside customers. Should the Austin division manager sell for $2.25? Show computations to support your answer.

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