Question

Presented below is selected financial information for two divisions of Samberg Brewing. Supply the missing information for the lettered items. (Round minimum rate of return and ROI to 1 decimal place, e.g. 10.5%.) Lager Lite Lager Contribution margin $500,000 $300,000 Controllable margin 200,000 (c) Average operating assets $ (a) $1,200,000 Minimum rate of return % (b) 11 % Return on investment 16 % % (d) Residual income $100,000 $204,000

Answer 1

Solution:-

	Lager	Lite Lager
Contribution margin	$500,000	$300,000
Controllable margin	$200,000	= 28% * $1,200,000 = $336,000 (c)
Average operating assets	= $200,000 / 16% = $1,250,000 (a)	$1,200,000
Minimum rate of return	= 16% - [ $100,000 /  $1,250,000 ] = 16% - 0.08 = 0.16 - 0.08 = 0.08 = 8% (b)	11 %
Return on investment	16 %	= [ $204,000 /  $1,200,000 ] + 11% = 0.28 = 28% (d)
Residual income	$100,000	$204,000