The Alpha division of Messene Corporation produces one product, a universal control that can be utilized in most hydraulic systems. Variable manufacturing costs are $16 and the fixed costs associated with operating the factory are $380,000 for 40,000 units. The selling price is $34 per unit. The division has net operating assets of $2,250,000 and the capacity to produce 50,000 units. Corporate management has a target rate of return of 16 percent on investment.
The Beta division of Messene is now buying 8,000 similar controls from outside suppliers at $30 each, but would like to purchase the same number of universal controls from the Alpha division if the price was $30. The manager of the Alpha division refuses to sell at that price since it would lower her return on investment. She has produced the following figures to prove her point:

Required:
1. What profit margin percentage must the Alpha division achieve in order to meet the desired ROI of 16 percent, assuming a selling price of $34.00?
2. Calculate the Alpha division's current ROI and future ROI if the offer is accepted. Explain the behaviour of the manager of the Alpha division.

Transcribed Image Text:

Selling price per unit $30.00 Variable cost Fixed cost ($380,000/40,000) Margin per unit $16.00 9.50 25.50 $ 4.50