For its three investment centers, Gerrard Company accumulates the following data

Question

For its three investment centers, Gerrard Company accumulates the following data: Sales Controllable margin Average operating 4,956,000 7,957,000 12,189,000 assets $1,940,000 $3,938,000 $3,914,000 941,640 2,466,670 4,022,370 The centers expect the following changes in the next year: (1) increase sales 16%; (II) decrease costs $396,000; (III) decrease average operating assets 504,000 Compute the expected return on investment (ROI) for each center. Assume center I has a controllable margin percentage of 78%. (Round R01 to 1 decimal place, eg. 1. The expected return on investment

Explanation / Answer

Solution:

ROI = Controllable margin / Average Operating Assets

Center 1: Increase in sales 16%

Expected sales = $1,940,000 *116% = $2,250,400

Controllable margin = 78% of sales = $2250400*78% = $ 1,755,312

ROI = $1,755,312/ 4,956,000 = 35.4%

Center II: Decrease in costs $396,000:

Controllable margin will increase by $396,000. Therefore ,

Controllable margin = $2,466,670 + $396,000 = $2,862,670

ROI = $2,862,670 / $7,957,000 = 36.0%

Center III: Decrease in Average Operating Assets $504,000:

New Average operating Assets = $12,189,000 - $504,000 = $11,685,000

ROI = $4,022,370 / $11,685,000 = 34.4%

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