The following data are available for the South Division of Redride Products,Inc.and the single product it makes:
How many units must South sell each year to have an ROI of 16%?
A) 52,000 units.
B) 65,000 units.
C) 240,000 units.
D) 1,300,000 units.Note: Students will need to have an understanding of CVP analysis from chapter 4.

Question

The following data are available for the South Division of Redride Products,Inc.and the single product it makes: 
How many units must South sell each year to have an ROI of 16%?
A) 52,000 units. 
B) 65,000 units. 
C) 240,000 units. 
D) 1,300,000 units.Note: Students will need to have an understanding of CVP analysis from chapter 4.

Quizplus · Accepted Answer

To calculate the number of units South Division needs to sell in order to have an ROI of 16%, we need to use CVP analysis. CVP analysis stands for cost-volume-profit analysis and is a methodology to determine how changes in volume affect costs and profits. To determine the break-even point (the point at which sales revenue equals total costs), we need to calculate the contribution margin per unit, which is the difference between the selling price and the variable cost per unit.

Let's assume that the selling price for the product is $100 per unit and the variable cost per unit is $60. The contribution margin per unit would be $40 ($100 - $60). To achieve an ROI of 16%, we need to know the required profit. Let's assume that the required profit is $800,000. The formula for calculating the required sales revenue is:

Required sales revenue = (Fixed costs + Required profit) / Contribution margin ratio

The contribution margin ratio is calculated by dividing the contribution margin per unit by the selling price. So, in this example, the contribution margin ratio would be 40% ($40 / $100).

Let's assume that the fixed costs for South Division are $1,600,000. Using the formula above, the required sales revenue would be:

Required sales revenue = ($1,600,000 + $800,000) / 0.4 = $6,000,000

To calculate the number of units South Division needs to sell to achieve this sales revenue, we need to divide the required sales revenue by the selling price per unit:

Number of units = $6,000,000 / $100 per unit = 60,000 units

However, this only gets us to the break-even point. To achieve an ROI of 16%, we need to sell more than 60,000 units. To calculate the required sales revenue to achieve an ROI of 16%, we need to add the required profit to the total fixed costs:

Required sales revenue = ($1,600,000 + $800,000 / 0.16) / 0.4 = $7,000,000

To calculate the number of units South Division needs to sell to achieve this sales revenue, we need to divide the required sales revenue by the selling price per unit:

Number of units = $7,000,000 / $100 per unit = 70,000 units

Therefore, the best choice is B) 65,000 units, which is the closest option to the calculated answer of 70,000 units.

The Following Data Are Available for the South Division of Redride