Brief Exercise 10-10 For its three investment centers, Gerrard Company accumulat

Question

Brief Exercise 10-10 For its three investment centers, Gerrard Company accumulates the following data: Sales Controllable margin Average operating assets5,044,000 $1,990,000 $3,962,000 $3,915,000 807,040 2,546,240 3,762,780 12,138,000 7,957,000 The centers expect the following changes in the next year: (I) increase sales 20%; (II) decrease costs $427,000; (III) decrease average operating assets $516,000. Compute the expected return on investment (ROI) for each center. Assume center I has a controllable margin percentage of 80%. (Round ROI to 1 decimal place e.9. 1.5 The expected return on investment LINK TO TEXT

Explanation / Answer

Ans :

ROI = Controllable margin / average operating assets.

For I , Sales increase by 20% = $ 1,990,000 * 120%

= $ 2,388,000

controllable margin = 80 % of sales

= 80% * $ 2,388,000

= $ 1,910,400

ROI for I = controllable margin / average operating assets

= $ 1,910,400 / 5,044,000

= 37.9 %

For II , decrease in cost $ 427,000

This will increase in controllable margin = $ 2,546,240 + $ 427,000

= $ 2,973,240

ROI for II , ROI = controllble margin / average operating assets

= $ 2,973,240 / $ 7,957,000

= 37.4 %

For III, Decrease in average operating assets

Average operating assets = 12,138,000 - $ 516,000

= $ 11,622,000

ROI = controllable margin / average operating assets

= 3,762,780 / 11,622,000

= 32.4 %

I II III Expected ROI 37.9% 37.4% 32.4%

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