Question

The service division of Raney Industries reported the following results for 2020. Sales Variable costs Controllable fixed costs Average operating assets $500,000 300,000 75,000 625,000 Management is considering the following independent courses of action in 2021 in order to maximize the return on investment for this divis
1. Reduce average operating assets by $125,000, with no change in controllable margin.
2. Increase sales $100,000, with no change in the contribution margin percentage.
Compute the controllable margin and the return on investment for 2020
Controllable margin $
Return on investment for 2020 %

Answer 1

Answer:

Controllable margin =$125,000

Return on investment = 20%

Explanation:

Controllable margin is the difference between the sales revenue and the controllable cost. Controllable costs include variable and fixed cost directly under the control of the manager and which are influenced by his decisions.

Controllable margin - Sales revenue - variable cost - controllable fixed cost

Controllable margin= $500,000 - $300,000 - 75,000 = $125,000

Controllable margin =$125,000

Return on investment = (controllable margin/ Average investment) × 100

                     = (125,000/625,000) ×  100 = 20%

Return on investment = 20%