The West Division of Nieto Company reported the following data for the current y

Question

The West Division of Nieto Company reported the following data for the current year. Sales $3,000,000 Variable costs $1,980,000 Controllable fixed costs- 600,000 Average Operating Assets 5,000,000 Top Management is unhappy with the investment center's return on investment (ROI). It asks the manager of the West Division to submit plants to improve the ROI in the next year. The manager believes it is feasible to consider the following independent courses of action. 1.) Increase sales by $320,000 with no charge in the contribution margin percentage. 2.) Reduce variable costs by $150,000. 3.) Reduce average operating assets by 4%. Instructions: a) Compute the return on investment (ROI) for the current year. b) Using the ROI formula, compute the ROI under each of the proposed courses of action. (Round to one decimal).

Explanation / Answer

Answer:

a) ROI = Net profit/Average operating asset = (3,000,000 - 1,980,000 - 600,000)/5,000,000 = 8.4%

b) Contribution margin % = Contribution margin/Sales = (3,000,000 - 1,980,000)/3,000,000 = 34%

1 .ROI = Net profit/Average operating asset = {(3,000,000+320,000)*34%} - 600,000)/5,000,000 = 10.576%

2. {3,000,000 - (1,980,000 - 150,000) - 600,000}/5,000,000 = 11.4%

3. (3,000,000 - 1,980,000 - 600,000)/{5,000,000 - (5,000,000*4%)} = 8.75%

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