Question Four: (17 marks) (B1, D4)

Part A: (9 marks)

A new product, an easy to store guitar stand, is being planned, with the following cost estimates: variable cost per unit, $9, and total fixed costs, $58,000. The projected sales price is $13 each.

Instructions (3 marks each)

1. Using the contribution margin approach, compute the number of units that must be sold to break even.
2. Using the same approach and assuming that fixed costs can be reduced by $8,000, how many units must be sold to produce a profit of $65,000?
3. Given the original information and the projection that 50,000 units can be sold, compute the selling price that the producer must use to obtain a profit of $150,000.

Part B: (8 marks)

Ahlia is an investment centre within Stickleback Co. Ahlia has an operating profit of $30,000, and operating assets of $150,000. The cost of capital is 15%. There is a proposed investment of $15,000 which will increase the operating income by $1,900.

Instructions (4 marks each)

1. What is the return on investment (ROI) for Ahlia with and without the proposed investment?
2. What is the residual income (RI) for Ahlia with and without the proposed investment?