Question

3) The Calculating Fashion Company has two operating divisions: North and South. The following information was collected from its financial statements. North South Operating income $ 15,375 S 9,160 Sales 90,100 128,445 Average operating assets 47,620 37,690 Required: The South Division has a goal to increase its ROI to 30% by the end of next year. Compute the increase (decrease) required in each of the following items in order to achieve this goal. a. Operating assets b. Total costs c. Sales

Answer 1

ROI would be 30%.

a.

ROI = Operating income / Operating assets

0.30 = 9160 / Operating assets

Operating assets = 9160 / 0.30

                           = 30,533

Operating assets would decrease by (37,690 – 30,533 =) $7,157 (Answer)

b.

Present total cost = Sales – Operating income

                             = 128,445 – 9,160

                             = 119,285

ROI = Operating income / Operating assets

0.30 = (Sales – Total cost) / Operating assets

0.30 = (128,445 – Total cost) / 37,690

0.30 × 37,690 = 128,445 – Total cost

11,307 – 128,445 = Total cost

Total cost = 117,138

Total cost would decrease by (119,285 – 117,138 =) $2,147 (Answer)

c.

ROI = Operating income / Operating assets

0.30 = (Sales – Total cost) / Operating assets

0.30 = (Sales – 119,285) / 37,690

0.30 × 37,690 = Sales – 119,285

11,307 + 119,285 = Sales

Sales = 130,592

Sales would increase by (130,592 – 128,445 =) $2,147 (Answer)