Question

Lombard, Inc. has two investment centers and has developed the following information:

Department A:
Departmental controllable margin $120,000
Average operating assets ?
Sales $800,000
ROI 10%

Department B:
Departmental controllable margin ?
Average operating assets $400,000
Sales $250,000
ROI 12%

1. What was the amount of Department A's average operating assets?
2. What was the amount of Department B's controllable margin?
3. If Department B is able to reduce its operating assets by $100,000, Department B's new ROI would be ____________.
4. If Department A is able to increase its controllable margin by $60,000 as a result of reducing variable costs, Department A's new ROI would be _________________.

Answer 1

Department A's average operating assets are $1,200,000, Department B's controllable margin is $48,000, Department B's new ROI after reducing assets by $100,000 would be 16%, and Department A's new ROI after increasing its controllable margin by $60,000 would be 15%.

Step-by-step explanation:

Answer to Investment Center Performance Analysis

1. To find Department A's average operating assets, we use the ROI formula which is ROI = (Controllable Margin / Average Operating Assets). We have Department A's ROI (10%) and its controllable margin ($120,000), so we calculate the assets as follows: 0.10 = $120,000 / Average Operating Assets. Thus, Average Operating Assets for Department A = $120,000 / 0.10 = $1,200,000.

2. Department B's controllable margin can be found using the same ROI formula: ROI = (Controllable Margin / Average Operating Assets). With Department B's ROI (12%) and its operating assets ($400,000), we calculate the margin: 0.12 = Controllable Margin / $400,000. Therefore, Controllable Margin for Department B = 0.12 * $400,000 = $48,000.

3. If Department B reduces its operating assets by $100,000, the new operating assets will be $400,000 - $100,000 = $300,000. The new ROI would be calculated as $48,000 / $300,000 = 16%.

4. If Department A increases its controllable margin by $60,000, the new controllable margin will be $120,000 + $60,000 = $180,000. The new ROI for Department A would be calculated as $180,000 / $1,200,000 = 15%.