Question

The South Division of Wiig Company reported the following data for the current year. Sales Variable costs Controllable fixed costs Average operating assets $2,900,000 1,914,000 600,000 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 $155,000. 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 (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 Action 2 Action 3

Answer 1

a
Return on Investment	7.72%
b
	Return on Investment
Action 1	9.76%
Action 2	10.82%
Action 3	8.13%
Workings:
Sales	2900000
Less: Variable costs	1914000
Contribution margin	986000
Contribution margin ratio	34%	=986000/2900000
a
Net Operating income	386000	=986000-600000
Divide by Average Operating Assets	5000000
Return on Investment	7.72%
b
Action 1:
Sales	3200000	=2900000+300000
X Contribution margin ratio	34%
Contribution margin	1088000
Net Operating income	488000	=1088000-600000
Divide by Average Operating Assets	5000000
Return on Investment	9.76%
Action 2:
Sales	2900000
Less: Variable costs	1759000	=1914000-155000
Contribution margin	1141000
Net Operating income	541000	=1141000-600000
Divide by Average Operating Assets	5000000
Return on Investment	10.82%
Action 3:
Net Operating income	386000
Divide by Average Operating Assets	4750000	=5000000*(1-5%)
Return on Investment	8.13%