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:

I

II

III

The centers expect the following changes in the next year: (I) increase sales 12%; (II) decrease costs $448,000; (III) decrease average operating assets $521,000.

Compute the expected return on investment (ROI) for each center. Assume center I has a controllable margin percentage of 72%. (Round ROI to 1 decimal place, e.g. 1.5.)

I

II

III

I

II

III

Sales $1,990,000 $3,975,000 $3,911,000 Controllable margin 955,130 2,649,240 3,892,480 Average operating assets 5,027,000 8,028,000 12,164,000

Explanation / Answer

I II III Sales 1990000 3975000 3911000 Controllable Margin 955130 2649240 3892480 Average Operating Assets 5027000 8028000 12164000 Existing Return 19.0% 33.0% 32.0% Preparing Data for Calculation I II III I II III Sales 2228800 3975000 3911000 1990000*112% Same Sales Same Sales Controllable Margin 1127066 3097240 3892480 2649240+448000 Same Costs (Working Note) Average Operating Assets 5027000 8028000 11643000 Same Same 12164000-521000 I II III Return on Investment(%): Working Note: I CM/Average Operating Assets Existing Sales 1990000 Controllable Margin 1127066 3097240 3892480 Change in Sales 238800 (1990000*12%) Average Operating Assets 5027000 8028000 11643000 Controllable Margin % 72% Expected Return on Investment(%) 22.4% 38.6% 33.4% Increase in Controllable Margin 171936 (238800*72%) Existing Controllable Margin 955130 Revised Controllable Margin 1127066

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