Question

For its three investment centers, Gerrard Company accumulates the following data: I II III Sales $2,070,000 $4,062,000 $4,044,000 Controllable margin 712,320 2,054,520 4,461,090 Average operating assets 5,088,000 7,902,000 12,057,000 The centers expect the following changes in the next year: (I) increase sales 18%; (II) decrease costs $430,000; (III) decrease average operating assets $450,000. Compute the expected return on investment (ROI) for each center. Assume center I has a controllable margin percentage of 70%. (Round ROI to 1 decimal place, e.g. 1.5.) I II III The expected return on investment % % %

Answer 1

Answer:

Centre I:
Sales increases by 18%:

Sales = $2,070,000 + ($2,070,000 * 18%) = $2,442,600
Controllable Margin = 70% of $2,442,600
Controllable Margin = $1,709,820

Return on Investment = 1,709,820 / 5,088,000 * 100
Return on Investment = 33.6%

Centre II:
Decrease costs $430,000:

Revised Controllable Margin = $2,054,520 + $430,000
Revised Controllable Margin = $2,484,520

Return on Investment = 2,484,520 / 7,902,000 * 100
Return on Investment = 31.4%

Centre III:
Decrease Average Operating Assets $450,000:

Revised Operating Assets = $12,057,000 - $450,000
Revised Operating Assets = $11,607,000

Return on Investment = 4,461,090 / 11,607,000 * 100
Return on Investment = 38.4%