Question

ROI and RI with manufacturing costs. Excellent Motor Company makes electric cars and has two
products, the Simplegreen, and the Excellentgreen. To produce the Simplegreen, Excellent Motor employed
assets of $10,500,000 at the beginning of 2017 and $14,450,000 of assets at the end of 2017. Other costs to
manufacture the Simplegreen include the following:

Direct materials $5,000 per unit
Setup $1,500 per setup-hour
Production $ 415 per machine-hour

General administration and selling costs for Simplegreen total of $7,820,000 in 2017. During the year, Excellent
Motor produced 11,000 Simplegreen cars using 6,000 setup-hours and 139,000 machine-hours. It sold these
cars for $12,000 each.
1. Assuming that Excellent Motor defines investment as average assets during the period, what is the
return on investment for the Simplegreen division? ( Would you include General administration and selling costs when calculating operating income, Chegg did not?)

Answer 1

Solution:

Statement for calculating Net income.

Details	Amount($)
Revenue (12,000*11,000)	$132,000,000
Less:
Production (415*139,000)	($57,685,000)
Set up (1,500*6,000)	($9,000,000)
Direct material (5,000*11,000)	($55,000,000)
General cost	($7,820,000)
Net income	$2,495,000

Average cost = ($10,500,000 + $14,450,000)/2

= $12,475,000

Now,

Return on investment = Net income / Average cost

= $2,495,000 / $12,475,000

= 0.2 or 20%

Therefore, Return on Investment = 20%