Question

he South Division of Sunland Company reported the following data for the current year. Sales $2,950,000 Variable costs 1,976,500 Controllable fixed costs 600,000 Average operating assets 5,000,000 Top management is unhappy with the investment center return on investment (ROI). It asks the manager of the South Division to submit plans to improve ROI in the next year. The manager believes it is feasible to consider the following independent courses of action. 1. Increase sales by $300,000 with no change in the contribution margin percentage. 2. Reduce variable costs by $155,000. 3. Reduce average operating assets by 3%.

Answer 1

ROI for current year = 7.47%

ROI for next year following alternative 1 = 9.45%

ROI for next year following alternative 2 = 10.57%

ROI for next year following alternative 3 = 7.70%

Step-by-step explanation:

Return on investment ROI formula = net profit / total investment

current year's net income:

revenue $2,950,000

- variable costs ($1,976,500)

- fixed costs ($600,000)

net income = $373,500

ROI current year = $373,500 / 5,000,000 = 7.47%

next year's net income following alternative 1:

revenue $3,250,000

- variable costs ($2,177,500)

- fixed costs ($600,000)

net income = $472,500

ROI current year = $472,500 / 5,000,000 = 9.45%

next year's net income following alternative 2:

revenue $2,950,000

- variable costs ($1,821,500)

- fixed costs ($600,000)

net income = $528,500

ROI current year = $528,500 / 5,000,000 = 10.57%

next year's net income following alternative 3:

revenue $2,950,000

- variable costs ($1,976,500)

- fixed costs ($600,000)

net income = $373,500

ROI current year = $373,500 / 4,850,000 = 7.70%