Question1 The service division of Raney Industries reported the following result

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Question1 The service division of Raney Industries reported the following results for 2017. Sales Variable costs Controllable fixed costs Average operating assets $568,400 341,040 90,400 673,800 Management is consldering the folilowing independent courses of action in 2018 in order to maximize the return on investment for this division. 1. Reduce average operating assets by $129,700, with no change in controllable margin 2. Increase sales $107,900, 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.) Controlilable margin Return on investment for 2017 Compute the controllable margin and the expected return on investment for each proposed alternative. (Round Ror to i decimal place, e.a. 1.5.) Alternative 1 Alternative 2 The controlilable margin The expected return on investment

Explanation / Answer

For Year 2017 Controllable Margin = $ 2,27,360 Return on Investment = 20.3% Workings: Controllable Margin = Sales - Variable Cost = $ 5,68,400 - $ 3,41,040 = $ 2,27,360 Return on Investment = *Return / Average operating assets X 100 = $ 1,36,960/$6,73,800 X 100 = 20.3% *Return = Sales - Variable Cost - Fixed Cost = $ 5,68,400 - $ 3,41,040 - $ 90,400 = $ 1,36,960 Alternative I Alternative II Controllable Margin = $ 2,27,360 $ 2,70,520 Return on Investment = 25.2% 36.3% Workings: Alternative I Controllable Margin = Sales - Variable Cost = $ 5,68,400 - $ 3,41,040 = $ 2,27,360 Return on Investment = *Return / **Average operating assets X 100 = $ 1,36,960/$5,44,100 X 100 = 25.2% (**Average operating assets = $ 6,73,800 - $ 1,29,700) *Return = Sales - Variable Cost - Fixed Cost = $ 5,68,400 - $ 3,41,040 - $ 90,400 = $ 1,36,960 Alternative II Controllable Margin = *Sales X **Controllable margin percentange = $ 6,76,300 X 40% = $ 2,70,520 *Sales = $ 5,68,400 + $ 1,07,900 = $ 6,76,300 **Controllable margin percentange = (Sales - Variable Cost)/ Sales ($ 5,68,400 - $ 3,41,040)/$ 5,68,400 = 40% No change in Controllable margin percentage hence it is computed with previous sales Return on Investment = *Return / Average operating assets X 100 = $ 2,44,860/$6,73,800 X 100 = 36.3% (**Average operating assets = $ 6,73,800 - $ 1,29,700) *Return = Sales - Variable Cost - Fixed Cost = $ 6,76,300 - $ 3,41,040 - $ 90,400 = $ 2,44,860

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