The Candle Division of Dax Wax Company reported the following results for 2009:

Question

The Candle Division of Dax Wax Company reported the following results for 2009: Management is considering the following independent alternative courses of action in 2010 in order to maximize the return on investment for the division. Reduce controllable fixed costs by 50% with no change in sales or variable costs Reduce average operating assets by 30% with no change in controllable margin Increase sales $200,000 with no change in the contribution margin percentage Compute the return on investment for 2009. Compute the expected return on investment for each of the alternative courses of action.

Explanation / Answer

a. net income = 800,000 - 420,000 - 100,000 = 280,000

ROI = net income/assets = 280,000/4,000,000 = 7%

b.
1. net income = 800,000 - 420,000 - 50,000 = 330,000

ROI = 330,000/4,000,000 = 8.25%

2. ROI = 280,000/(4,000,000*.7) = 10%

3. contribution margin = (800,000-420,000)/800,000 = 47.5%

net income = 1,000,000*.475 - 100,000 = 375,000

ROI = 375,000/4,000,000 = 9.375%

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