Question

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			%

Answer 1

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%