Exericse 24-17 The South Division of Wiig Company reported the following data fo

Question

Exericse 24-17 The South Division of Wiig Company reported the following data for the current year Sales Variable costs Controllable fixed costs Average operating assets $3,065,000 1,998,380 609,800D 4,902,800 ROI in the next year. The manager believes it is feasible to consider the following 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 independent courses of action. 1. Increase sales by $321,000 with no change in the contribution margin percentage. Reduce variable costs by $152,000 3. Reduce average operating assets by 396. (o) Compute the return on investment (ROI) for the current year. (Round ROI to 1 decimal place, e.g. 1.5.) 9% Retum on Investment (b) Using the ROt formula, compute the ROI under each of the proposed courses of action. (Round ROI to I decimal place, e.g 1.5., Return on investment 06 Action 1 Action 2 Action 3 96

Explanation / Answer

(a) ROI for the current year :-

PROFIT = SALES - VARIABLE COST- FIXED COST

PROFIT= $ 3065000 -$ 1998380 -$ 609800

= $ 456820

NOW ,

ROI = PROFIT/ OPERATING ASSESTS*100

= $456820/$4902800*100

= 9.327%

(b)

ACTION 1 :- IF SALES INCREASE BY $321000

NEW SALES= $321000+$3065000

= $ 3386000

PROFIT = $3386000-$1998380-$609800

= $ 777820

ROI = $777820/$4902800*100

= 15.86%

ACTION 2:-  VARABLE COST IS REDUCE BY $ 152000

NEW VC = $1998380- $ 152000

= $ 1846380

PROFIT= $ 3065000- $ 1846380- $ 609800

= $ 608820

ROI = $ 608820/ $4902800*100

= 12.42%

ACTION 3 :- OPERATING ASSESTS ARE REDUCED BY 3% i.e. BY $ 147084

NEW OPERATING ASSESTS = $ 4902800+ $ 147084

= $ 4755716

ROI = $ 456820/$ 4755716 *100

= 9.16%

  

  

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