Question

Fabulous Motor Company makes electric cars and has only two products, Simplegreen and Fabulousgreen. To produce Simplegreen, Fabulous Motor employed assets of $ 14,600,000 at the beginning of the period, and $ 27,300,000 of assets at the end of the period. Other costs to manufacture Simplegreen include the following:
Direct materials ................. $ 1,000 per unit
Setup ..................... $ 1,800 per setup- hour
Production .................. $ 580 per machine- hour

General administration and selling costs total $ 8,460,000 for the period. In the current period, Fabulous Motor produced 8,000 Simplegreen cars using 7,000 setup- hours and 178,600 machine- hours. Fabulous Motor sold these cars for $ 17,000 each.

Required
1. Assuming that Fabulous Motor defines investment as average assets during the period, what is the return on investment for the Simplegreen division?
2. Calculate the residual income for Simplegreen if Fabulous Motor has a required rate of return of 13% on investments.



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  • CreatedJanuary 15, 2015
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