Question

The South Division of Bramble Company reported the following data for the current year. Col1 = Sales, Variable costs, Controllable fixed costs, Average operating assetsCol2 = $3,050,000, 2,013,000, 610,000, 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 $160,000. 3. Reduce average operating assets by 5%.(a) Compute the return on investment (ROI) for the current year. (Round ROI to 2 decimal places, e.g. 1.57%.) Return on Investment 8.5|| % (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 5.6 Action 2 Action 3

Answer 1

Answer:

a. 9.15%

b. Please check the answer below.

Explanation:

Solution a:

Net operating income for the current year = Sales - Variable cost - Controllable fixed costs

= $3,050,000 - $1,982,500 - $610,000 = $457,500

Average operating assets = $5,000,000

Return on investment = Net operating income / Average operating assets = $457,500 / $5,000,000 = 9.15%

Solution b:

Action 1:

Contribution margin ratio = ($3,050,000 - $1,982,500) / $3,050,000 = 35%

Increase in operaating income if sales increased by $300,000 = $300,000*35% = $105,000

New operating income = $457,500 + $105,000 = $562,500

Return on investment = $562,500 / $5,000,000 = 11.25%

Action 2:

New variable cost = $1,982,500 - $150,000 = $1,832,500

New net operating income = $3,050,000 - $1,832,500 - $610,000 = $607,500

New ROI = $607,500 / $5,000,000 = 12.15%

Action 3:

New average operating assets = $5,000,000*97% = $4,850,000

New ROI = $457,500 / $4,850,000 = 9.43%