Question

The current controllable margin for Henry Division is $48000. Its current operating assets are $300000. The division is considering purchasing equipment for $90000 that will increase annual controllable margin by an estimated $5000. If the equipment is purchased, what will happen to the return on investment for Henry Division?

Answer 1

Answer:

8.36% Increase

Explanation:

Calculation to determine what will happen to the return on investment for Henry Division

First step is to determine the return on investment using this formula

Return on investment = (Controllable margin ÷ Operating assets) × 100

Let plug in the formula

Return on investment= ($48,000 ÷ $300,000) × 100

Return on investment= 16%

Second step is to determine the new controllable margin

New controllable margin= $90,000 + $5,000

New controllable margin= $95,000

Third step is to calculate the new operating assets

New operating assets= $300,000 + $90,000

New operating assets= $390,000

Fourth step is to calculate new return on investment

New return on investment = ($95,000 ÷ $390,000) × 100

New return on investment =24.36%

Now let determine what will happen to the return on investment for Henry Division

Return on investment = 16% - 24.36%

Return on investment= 8.36% Increase

Therefore what will happen to the return on investment for Henry Division will be 8.36% Increase.