Question

The South Division of Wiig Company reported the following data for the current year. Sales $2,950,000 Variable costs 1,976,500 Controllable fixed costs 605,000 Average operating assets 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. Increase sales by $300,000 with no change in the contribution margin percentage. 2. Reduce variable costs by $150,000. 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

Answer 1

Return on Investment = Net operating income Average operating Assets Sales Revenue Variable Costs contirbution MARgin Fixed Cost Net operating Income Average Operating Assets 2950000 1976500 67% 973500 33% 605000 368500 5000000 A) Return on Investment = 368500/5000000 B) Sales Contribution Margin (34%) 1 Fixed cost Net operating Income Return on Investment = 4675000/5000000 7.37% Answer Increase sale by $300000 3250000 1072500 605000 467500 9.35% Answer Reducue the Variable Cost by $150000 2 Increase in Net operating income $150,000 Return on Investment 518500/5000000 518500 10.37% Answer Reduce Operating Assets by 5% 3 Operating Assets $5000,000* (1-5%) Return on Investment = 368500/4750000 4750000 7.76% Answer