Question

Real Wood Structures Company has invested $870,000 in a plant to build small tool sheds. The target operating income desired from the plant is $217,500 annually. The company plans annual sales of 1,300 sheds at a selling price of $900 each. What is the target rate of return on investment for Real Wood Structures Company? O A. 28% OB. 75% O C. 18.6% O D. 25%

Answer 1

The correct answer is OPTION D i.e 25%

The calculated target rate of return on investment for Real Wood Structures Company is 25%

Explanation :

Rate of Return on Investment (ROI) is that rate which can be calculated using the amount of initial investment made and the operating income that the company can earn from such an investment.

In the given case, the target rate of Return on Investment (ROI) for real Woods Structures Company can be calculated by using the formula :

Return on Investment (ROI) = Operating Income/Initial Investment x 100

Given,

Initial Investment = $870,000

Target Operation Income = $217,500

So, using the formula :

Return on Investment (ROI) = Operating Income/Initial Investment x 100

ROI = $217,500/$870,000 x100 = 25%

Therefore, Desired Rate of Return on investment = 25%

Rate of Return on investment is used to determine that how much return a certain investment is making and is it beneficial for the company or not.
The higher the Rate of Return (ROI), the favourable is the investment.