3. The service division of Smithberg Industries reported the following results f

Question

3. The service division of Smithberg Industries reported the following results for 2014. Sales $800,000 Variable costs 500,000 Controllable Fixed Costs 125,000 Average operating assets 825,000

Compute the controllable margin and the return on investment for 2014.

4. Management is considering the following independent courses of action in 2015 in order to maximize the return on investment for this division. (Based on original financial information above). Compute the controllable margin and the expected ROI for each proposed alternative.

a) Reduce average operating assets by $125,000 with no change in controllable margin.

b) Increase sales $100,000 with no change in contribution margin percentage.

Explanation / Answer

Q3. Income Statement sales 800000 Less: Variable cost 500000 Contribution margin 300000 Less: Controllable fixed cost 125000 Controllable margin 175000 Divide: Average Operating assets 825000 Return on investment 21.21% Q4-a: Revised Operating assets: 825000-125000 = 700,000 Controllable margin: 175000 Divide: Revised Assets 700,000 Rreturn on investment 25% Q4-b: CM rattio: 300,000/800,000 *100 = 37.50% Revised Controllable margin: Original margin 175000 Add: Increased Contribution 37500 (100000*37.50%) Revised Controllable margin 212500 Divide: Operating assets 825000 Return on Investment 25.76%

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