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

Question

Brief Exercise 10-10o For its three investment centers, Gerrard Company accumulates the following data: Sales Controllable margin Average operating assets the centers expect the folio ing changes n the next year: 1 increase sales 20%, a decrease costsp90,000: Compute the expected return on investment (ROI) for each center. Assume center t has a controlable margin percentage of 70% (Round nor to 1 deci $1,980,000 $3,916,000 $4,041,000 1,169,320 2,150,280 4,597,620 5,084,000 7,964,000 12.099,000 (III) decrease average operating assets $496,000. al p ce, ag. I SJ

Explanation / Answer

Calculation of return on investment: Return on investment= controllable margin/average operating assets*100 I) Sales=$1980000 Contribution margin= 1980000*0.70=$1386000 Controllable Fixed cost= Contribution margin- controllable margin                                               =1386000-1169320=$216680 Sales (1980000*1.20)=$2376000 Contribution margin= 2376000*0.70=$1663200 Controllable margin=1663200-216680=$1446520 Average operating assets=$5084000 Return on investment= 1446520/5084000*100=28.5% Expected Return on investment=28.5% II) Cotrollable margin= 2150280+390000=$2540280 Average operating assets= $7964000 Return on investment= 2540280/7964000*100=31.9% Exoected Return on investment= 31.9% III) Controllable margin=$4597620 Average operating assets=12099000-496000=$11603000 Return on investment= 4597620/11603000*100=39.6% Expected Return on Investment=39.6%

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