Question

               

Problem 22-5A (Part Level Submission)

Optimus Company manufactures a variety of tools and industrial equipment. The company operates through three divisions. Each division is an investment center. Operating data for the Home Division for the year ended December 31, 2017, and relevant budget data are as follows.

Actual

Comparison with Budget

Sales                                                                                     $1,400,000                           $101,000              favorable

Variable cost of goods sold                                           675,000                                 55,000   unfavorable

Variable selling and administrative expenses                       126,000                                 25,000   unfavorable

Controllable fixed cost of goods sold                                        170,000                                 On target            

Controllable fixed selling and administrative expenses                    81,000                   On target            

Average operating assets for the year for the Home Division were $1,999,000 which was also the budgeted amount.

Prepare a responsibility report for the Home Division. (List variable costs before fixed costs. Round ROI to 1 decimal place, e.g. 1.5.)

OPTIMUS COMPANY

Home Division

Responsibility Report

For the Year Ended December 31, 2017

Difference

                     

                         Budget                                  Actual

Sales                    1299000                             1400000                     101000                                      

VARIABLE COSTS

COGS                        620000                         675000                          55000

Selling admin cost   101000                            126000                         25000                                              

Total variable           721000                             801000                        80000

Contribution margin 578000                           599000                         21000                                    

Controllable direct fix   170000                        170000                         

COGS                              251000                          251000                                             

Selling admin cost      81000                              81000

Control Margin            327000                              348000                         21000

ROI                       16.36%                                         17.41 %                                                         1.05%          

(c)

Compute the expected ROI in 2017 for the Home Division, assuming the following independent changes to actual data. (Round ROI to 1 decimal place, e.g. 1.5.)

The expected ROI

(1)                          Variable cost of goods sold is decreased by 7%.                 

%

(2)                          Average operating assets are decreased by 12%.               

%

(3)                          Sales are increased by $201,000, and this increase is expected to increase contribution margin by $86,000.                              

%

Answer 1

ROI = Net operating income / Average assets

1) If varaiable cost of goods sold is decreased by 7%, then revised net operating income = $348,000 + $675,000*7% = $381750

ROI = $381750 / $2,000,000 = 19.7%

2) If average operating assets are decrease by 10%, then new average operating assets = $1999,000 * 88% = $1,759120

ROI = $348,000 / $1,759120 = 19.78%

3)Sales increased by $201,000 resulting in increase in contribution margin by $86,000, then

new operating income = $348,000 + $86,000 = $434000

ROI = $434,000 / $2,000,000 = 21.7%