Question

Exercise 10-17 (Video) The South Division of Wiig Company reported the following data for the current year Sales $3,000,000 Variable costs 1,950,000 Controllable fixed costs 600,000 Average operating assets 5,000,000 Top management is unhappy with the investment center's return on investment (ROI). It asks the manager believes it is feasible to consider the following independent courses of action the South Division to submit plans to improve ROI in the next year. The manager 1. 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 4% (a) Compute the return on investment (ROI) for the current year. (Round R0I 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

Return on Investment = Net operating income/Average operating Assets Sales Revenue Variable Costs 3000000 1950000 65% contirbution MARgin 1050000 35% Fixed Cost Net operating Income Average Operating Assets 600000 450000 5000000 A) Return on Investment = 450000/5000000 B) Sales Contribution Margin (35%) 1 Fixed cost Net operating Income Return on Investment 600000/5000000 9.00% Answer Increase sale by $300000 3300000 1155000 600000 555000 11.10% Answer Reducue the Variable Cost by $15000 2 Increase in Net operating income $150,000 Return on Investment = 600000/5000000 600000 12.00% Answer Reduce Operating Assets by 4% 3 Operating Assets = $5000,000*(1-4%) Return on Investment = 450000/4800000 4800000 9.38% Answer