Question

The current controllable margin for Henry Division is $78000. Its current operating assets are $300000. The division is considering purchasing equipment for $90000 that will increase annual controllable margin by an estimated $12000. If the equipment is purchased, what will happen to the return on investment for Henry Division

Answer 1

See below

Step-by-step explanation:

The computation of return on investment is seen below

= (Controllable margin ÷ Operating assets) × 100

= ($78,000 ÷ $300,000) × 100

= 26%

Now, the controllable margin equals to = $78,000 + $12,000

= $90,000

And the new operating assets would be;

= $300,000 + $90,000

= $390,000

So, the new return on investment equals to

= ($90,000 ÷ $390,000) × 100

= 23.08%

Therefore, the return on investment decreased by

= 26% - 23.08%

= 2.92%