The Green Division of Frizell Company reported the following data for the curren
ID: 2389807 • Letter: T
Question
The Green Division of Frizell Company reported the following data for the current year.Sales $3,110,400
Variable costs 1,963,500
Controllable fixed costs 601,800
Average operating assets 5,243,600
Top management is unhappy with the investment center's return on investment (ROI). It asks the manager of the Green 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.
Increase sales by $328,000 with no change in the contribution margin percentage.
Reduce variable costs by $104,600.
Reduce average operating assets by 4%.
Compute the return on investment (ROI) for the current year. _______%
Using the ROI formula, compute the ROI under each of the proposed courses of action. (Round computations for contribution margin percentage to 0 decimal places, i.e. 25 and final answers to one decimal place, i.e. 15.5.)
1. ???
2. ???
3. ???
Explanation / Answer
The formula of ROI is net Controllable income divided by capital employed.
Increase sales by $328,000 with no change in the contribution margin percentage.
Original contribution margin = (3110400 - 1963500)/311040 = 0.3687
Original contribution = 3110400 - 1963500 = $1146900
So, when sales increase by $328,000, the corresponsing increase in contribution will be $120944
Thus, total contribution = 1146900 + 120944 = $1267844
Total profit = 1267844 - 601800 = $666044
ROI = 666044/5243600 x 100 = 12.7%
Reduce variable costs by $104,600.
Profit will increase by 104600 to (666044 + 104600) = $770644
ROI = 770644/5243600 x 100 = 14.7%
Reduce average operating assets by 4%.
New average operating asset = 5243600 * 0.96 = $5033856
ROI = 666044/5033856 x 100 = 13.2%
Hope this helps!
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