Problem 22-5A (Part Level Submission) Optimus Company manufactures a variety of

Question

Problem 22-5A (Part Level Submission) Optimus Company manufactures a variety of tools and industrial equipment. The company operates through three divisions. Each division is an investment center. Operating data for the Home Division for the year ended December 31, 2017, and relevant budget data are as follows. Actual Comparison with Budget Sales Variable cost of goods sold Variable selling and administrative expenses Controllable fixed cost of goods sold Controllable fixed selling and administrative expenses $1,400,000 $100,000 favorable 5,000 unfavorable 25,000 unfavorable 665,000 125,000 70,000 On target 0,000 On target Average operating assets for the year for the Home Division were $2,000,000 which was also the budgeted amount.

Explanation / Answer

Solution c:

ROI = Net operating income / Average assets

1) If varaiable cost of goods sold is decreased by 5%, then revised net operating income = $360,000 + $665,000*5% = $393,250

ROI = $393,250 / $2,000,000 = 19.7%

2) If average operating assets are decrease by 10%, then new average operating assets = $2,000,000 * 90% = $1,800,000

ROI = $360,000 / $1,800,000 = 20%

3)Sales increased by $200,000 resulting in increase in contribution margin by $80,000, then

new operating income = $360,000 + $80,000 = $440,000

ROI = $440,000 / $2,000,000 = 22%

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