The service division of Raney Industries reported the following results for 2017
ID: 2544622 • Letter: T
Question
The service division of Raney Industries reported the following results for 2017
Average operating assets
683,900
Sales $554,000 Variable costs 332,400 Controllable fixed costs 75,100Average operating assets
683,900
Management is considering the following independent courses of action in 2018 in order to maximize the return on investment for this division 1. Reduce average operating assets by $128,900, with no change in controllable margin. 2. Increase sales $106,500, with no change in the contribution margin percentage. Compute the controllable margin and the return on investment for 2017. (Round ROI to 1 decimal place, e.g. 1.5.) Controllable margin Return on investment for 2017 LINK TO TEXT Compute the controllable margin and the expected return on investment for each proposed alternative. (Round ROI to 1 decimal place, e.g. 1.5.) Alternative 1 Alternative 2 The controllable margin The expected return on investmentExplanation / Answer
Solution:
Controllable Margin
40%
Return on Investment
21.4%
Alt 1
Alt2
Controllable Margin
40%
40%
Expected Return on Investment
26.4%
28.6%
Working:
Controllable margin = sales-variable cost/sales
554,000-332,400 / 554,000 = 40%
Return = Sales - Variable costs - Fixed costs
= 554,000-332,400 - 75,100
= 146,500
Return on investment = Return / Average operating assets * 100
= 146,500/ 683,900 * 100
= 21.42%
Alternative 1)
Controllable Margin = 40%
Average operating asset = 683,900 - 128,900 = 555,000
Return on Investment = 146,500/555,000*100 = 26.40%
Alternative 2)
Revised VC = (554,000+106,500) * (332,400/554000) = 396,300
Controllable Margin = (554,000+106,500 - 396,300) / (554,000+106,500) = 0.4 = 40%
Return = (554,000+106,500) - 396,300 - 75,100 = 189,100
Return on Investment = 189,100 / 660500 * 100 = 28.63%
Controllable Margin
40%
Return on Investment
21.4%
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