Deborah Lewis, general manager of the Northwest Division of Berkshire Co., has significant authority over pricing decisions as well as programs that involve cost reduction/control. The data that follow relate to upcoming divisional operations:
Average invested capital: $15,000,000
Annual total fixed costs: $3,900,000
Variable cost per unit: $80
Number of units expected to be sold: 120,000
Assume the unit selling price is $132 and that Berkshire has a 16% imputed interest charge.
Top management will promote Deborah to corporate headquarters if her division can generate $200,000 of residual income (RI). If Deborah desires to move to corporate, what adjustment must the division do to the amount of annual total fixed costs?
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