Question

Weygandt, Financial and Managerial, 3e MANAGEMENT ACCOUNTING CALCULATOR MESSAGE MY İNSTRUCTOR STANDARD VİEW PRINTER VERSION cise 23-17 (Video) outh Division of Sheffield Company reported the following data for the current year able costs trollable fixed costs rage operating assets $2,950,000 1,947,000 605,000 5,000,000 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 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. Reduce variable costs by $150,000. Reduce average operating assets by 5%. ) Compute the return on investment (ROI) for the current year, (Round R01 to 2 decimal places, eg. 1.57%.) turn on Investment ) 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 ction 1 ction 2 ction 3 Click if you would like to Show Work for this question: Open Show Work

Answer 1

(a).

Return on investment = 7.96%

Explanation;

Return on investment = Net operating income / Average operating assets

Net operating income ($2950000 – $1947000 – $605000) = $398000

Average operating assets = $5000000

Hence, Return on investment ($398000 / $5000000) = 7.96%

(b).

Action – 1; Return on investment = 10%

Action – 2; Return on investment = 10.96%

Action – 3; Return on investment = 8.38%

Explanation;

Action – 1;

Return on investment = Net operating income / Average operating assets

Net operating income ($3250000 – $2145000 – $605000) = $500000

Average operating assets = $5000000

Hence, Return on investment ($500000 / $5000000) = 10%

Action – 2;

Return on investment = Net operating income / Average operating assets

Net operating income ($2950000 – $1797000 – $605000) = $548000

Average operating assets = $5000000

Hence, Return on investment ($548000 / $5000000) = 10.96%

  

Action – 3;

Return on investment = Net operating income / Average operating assets

Net operating income ($2950000 – $1947000 – $605000) = $398000

Average operating assets ($5000000 * 0.95) = $4750000

Hence, Return on investment ($398000 / $4750000) = 8.38%