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.

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what is the turnover at this level of sales?
my answer was wrong as it was:
>> "1400000".
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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.

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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%.
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it is still wrong. I'm still so close but not sure what is the right one

1 answer

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}.