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 a).
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.