Question

MESSAGE MY INSTRUCTOR FULL SON UNIER Brief Exercise 24-10 For its three investment centers, Gerrard Company accumulates the following data Sales Controllable margin Average operating assets $1,980,000 82,720 4,904,000 $4,056.000 2.413,200 8,044,000 $3.965.000 4.596.430 12,096,000 The centers expect the following changes in the next year (1) increase sales 10% (II) decrease cost $437,000 (ILT) decrease average operating assets $510.000 Compute the expected return on investment (ROI) for each center. Assume center has a control a rg percentage of ound RO I decimal 1.5) The expected return on investment TO TEXT

Answer 1

	I	II	III
Return on Investment	34.60%	35.40%	39.70%

Working:

ROI = Controllable margin / Average Operating Assets

Center I: Increase in sales 10%

Expected sales = $1,980,000 *110% = $2,178,000

Controllable margin = 78% of sales = $2178000*78% = $ 1,698,840

ROI = $1698840/4904,000 = 34.6%

Center II: Decrease in costs $437,000:

Controllable margin will increase by $437,000. Therefore ,

Controllable margin = $2,413,200 + $437,000 = $2,850,200

ROI = $2,850,200 / $8044000= 35.4%

Center III: Decrease in Average Operating Assets $510,000:

New Average operating Assets = $12,096,000 - $510,000 = $11,586,000

ROI = $4,596,480 / $11,586,000 = 39.7%