Exercise 10-17 The South Division of Wiig Company reported the following data fo
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Question
Exercise 10-17
The South Division of Wiig Company reported the following data for the current year.
Top management is unhappy with the investment center’s 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.
(a) Compute the return on investment (ROI) for the current year. (Round ROI to 1 decimal place, e.g. 1.5.)
(b) Using the ROI formula, compute the ROI under each of the proposed courses of action. (Round ROI to 1 decimal place, e.g. 1.5.)
Return on investment
Sales $2,955,000 Variable costs 1,973,940 Controllable fixed costs 602,200 Average operating assets 5,041,000Explanation / Answer
Sales 2955000 Less: Variable Costs 1973940 CM Ratio Contribution Margin 981060 33.20% (981060/2955000) Less: Controllable Fixed Costs 602200 Net Operating Income 378860 Average Operating Assets 5041000 A Return on Investment(%): NOI/Average Operating Income (378860/5041000) 7.5% B Preparing Data for Calculation Actual Data Action 1 Action 2 Action 3 Action 1 Action 2 Action 3 Sales 2955000 3274000 2955000 2955000 Sales+319000 Same Sales Same Less: Variable Costs 1973940 2187032 1821040 1973940 Variable Cost-152900 Same Contribution Margin 981060 1086968 1133960 981060 Revised Sales*33.20% Net Net Less: Controllable Fixed Costs 602200 602200 602200 602200 Same Same Same Net Operating Income 378860 484768 531760 378860 Net Net Net Average Operating Assets 5041000 5041000 5041000 4889770 Same Same Av. Operating Assets*97% Actual Data Action 1 Action 2 Action 3 Return on Investment(%): NOI/Average Operating Income Net Operating Income 378860 484768 531760 378860 Average Operating Assets 5041000 5041000 5041000 4889770 Return on Investment(%) 7.5% 9.6% 10.5% 7.7% Best Option is Action 2 increasing ROI from 7.5% to 10.5%
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