Question

Betsy Union is the Vaughn Manufacturing manager and her performance is evaluated by executive management based on Division ROI. The current controllable margin for Vaughn Manufacturing is 42000. Its current operating assets total $210000. The division is considering purchasing equipment for $40000 that will increase sales by an estimated $10000, with annual depreciation of $10000. If the equipment is purchased, what will happen to the return on investment for the division?

Answer 1

Decrease from 20% to 16.8%

Step-by-step explanation:

Firstly, we calculate current ROI of the division:

ROI = Margin/Operating asset = 42,000/210,000 = 20%

When the division acquire the new asset, there are following changes in the financials of the company:

• Operating asset will increase to 210,000 + 40,000 = 250,000
• Margin will increase to 42,000 + (10,000 - 10,000) = 42,000.

So, post - purchase ROI will decrease to 42,000/250,000 = 16.8%.