The South Division of Wiig Company reported the following data
for the current year.
Sales | $3,000,000 | |
Variable costs | 2,010,000 | |
Controllable fixed costs | 605,000 | |
Average operating assets | 5,000,000 |
Top management is unhappy with the investment center’s return on
investment (ROI). It asks the manager of the South Division to
submit plans to improve ROI in the next year. The manager believes
it is feasible to consider the following independent courses of
action.
1. | Increase sales by $300,000 with no change in the contribution margin percentage. | |
2. | Reduce variable costs by $155,000. | |
3. | Reduce average operating assets by 3%. |
(a) Compute the return on investment (ROI) for the
current year. (Round ROI to 2 decimal places, e.g.
1.57%.)
Return on Investment | % |
(b) Using the ROI formula, compute the ROI under
each of the proposed courses of action. (Round ROI to 2
decimal places, e.g. 1.57%.)
Return on investment |
|||
Action 1 | % | ||
Action 2 | % | ||
Action 3 | % |
Sales | 3000000 | |
Less: Variable costs | 2010000 | |
Contribution margin | 990000 | |
Less: Controllable fixed costs | 605000 | |
Net Operating income | 385000 | |
Contribution margin ratio | 33% | =990000/3000000 |
a | ||
Net Operating income | 385000 | |
Divide by Average operating assets | 5000000 | |
Return on Investment | 7.70% | |
b | ||
Action 1: | ||
Net Operating income | 484000 | =385000+(300000*33%) |
Divide by Average operating assets | 5000000 | |
Return on Investment | 9.68% | |
Action 2: | ||
Net Operating income | 540000 | =385000+155000 |
Divide by Average operating assets | 5000000 | |
Return on Investment | 10.80% | |
Action 3: | ||
Net Operating income | 385000 | |
Divide by Average operating assets | 4850000 | =5000000*(1-3%) |
Return on Investment | 7.94% |
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