Exercise 202 The Atlantic Division of Stark Productions Company reported the fol

Question

Exercise 202 The Atlantic Division of Stark Productions Company reported the following results for 2016: Sales Variable costs Controllable fixed costs Average operating assets $4,000,000 3,200,000 300,000 2,500,000 Management is considering the following independent alternative courses of action in 2017 in order to maximize the return on investment for the division. Reduce controllable fixed costs by 10% with no change in sales or variable costs. Reduce average operating assets by 10% with no change in controllable margin. Increase sales $500,000 with no change in the contribution margin percentage. 1. 3. Compute the return on investment for 2016. Return on Investment Compute the expected return on investment for each of the alternative courses of action. (Round answers to 1 decimal place, e.g. 52.7.) Return on Investment 2. 3.

Explanation / Answer

Return on investment=(4000000-3200000-300000)/2500000= 20% Return on investment 1 21.2% =(4000000-3200000-270000)/2500000 2 22.2% =(4000000-3200000-300000)/2250000 3 24.0% =(4500000-3600000-300000)/2500000 Workings: Fixed costs under 1=300000*(1-0.1)=$270000 Average operating assets under 2=2500000*(1-0.1)=$2250000 Variable costs under 3=3200000/4000000*4500000 = $3600000

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