Chaucer Ltd

Essay

Chaucer Ltd. has current assets of $450,000 and capital assets of $630,000. Its budgeted production volume for the next fiscal year is 200,000 units. Fixed costs are projected at $400,000 and variable unit costs for the one product produced total $5/unit. The company defines ROI as Operating Income/Total Assets and its required rate of return is 14%.
Required:
a. What selling price should Chaucer charge for its product if it wishes to achieve a 25% ROI? What is the operating income at this price?
b. The general manager for Chaucer receives a bonus equal to 12% of the residual income for the period. Calculate the amount of the bonus assuming the selling price calculated in part
c. Prepare a brief memo to the President of Chaucer outlining the advantages and disadvantages of ROI and Residual Income. Include your recommendations for the most appropriate method for calculating the bonus.