The service division of Raney Industries reported the following results for 2017

Question

The service division of Raney Industries reported the following results for 2017. Sales Variable costs Controllable fixed costs Average operating assets $567,200 340,320 95,700 609,100 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 $127,100, with no change in controllable margin. 2. Increase sales $102,300, 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 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 margirn The expected return on investment

Explanation / Answer

1 Controllable margin = $     1,31,180 Return on Investment 2017 = 21.5% Workings: Sales = $     5,67,200 Less: Variable cost = $     3,40,320 Contribution margin = $     2,26,880 Less: Controllable fixed cost = $        95,700 (a) Controllable margin = $     1,31,180 (b) Average Operating Assets = $     6,09,100 (a) / (b) Return on Investment 2017 = 21.5% Variable cost ratio = ($34,0320 / $5,67,200) X 100 = 60% 2 Altrnative 1 Altrnative 2 Controllable margin = $     1,31,180 $   1,72,100 Expected Return on Investment = 27.2% 28.3% Workings: Altrnative 1 Altrnative 2 Sales = $     5,67,200 $   6,69,500 Less: Variable cost = $     3,40,320 $   4,01,700 Contribution margin = $     2,26,880 $   2,67,800 Less: Controllable fixed cost = $        95,700 $       95,700 (a) Controllable margin = $     1,31,180 $   1,72,100 (b) Average Operating Assets = $     4,82,000 $   6,09,100 (a) / (b) Return on Investment 2017 = 27.2% 28.3% Altrnative 1 Average Operating Assets = $     6,09,100 Reduced by = $     1,27,100 Total = $     4,82,000 Altrnative 2 Sales = $     5,67,200 Increases by = $     1,02,300 Total = $     6,69,500 New Variable cost to maintain the same contribution ratio : New Variable cost = Sales X variable cost ratio = $6,69,500 X 60% = $     4,01,700

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