The service division of Raney Industries reported the following results for 2017

Question

The service division of Raney Industries reported the following results for 2017. Sales Variable costs Controllable fixed costs Average operating assets $557,600 334,560 85,200 669,300 Management is considering the following independent courses of action in 2018 in order to maximize the return on investment for this division. 1. Reduce average operating assets by $122,600, with no change in controllable margin. 2. Increase sales $103,800, 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) Controllable margin Return on investment for 2017 Compute the controllable margin and the expected return on investment for each proposed alternative. (Round ROI to 1 decimal place, e.g. 1.5.) Alternative 1 Alternative 2 The controllable margin The expected return on investment

Explanation / Answer

Solution:

Controllable Margin is the contribution margin less the controllable fixed costs.

Part 1 -- 2017

Controllable Margin = Sales – Variable Cost – Controllable Fixed Cost

= 557,600 – 334,560 – 85,200

= $137,840

Return on Investment 2017 = Controllable Margin / Average Operating Assets x 100

= 137,840 / 669,300 x 100

= 20.59%

Part 2 – Proposed Alternatives

Controllable Margin

Alternative 1

%

Alternative 2

Sales

$557,600

$661,400

Less: Variable Costs

($334,560)

($396,840)

Contribution Margin

$223,040

40.00%

(223,040 / 557,600 x 100)

$264,560

(661,400*40%)

Less: Controllable Fixed Costs

($85,200)

($85,200)

Controllable Margin

$137,840

$179,360

Return on Investment

Alternative 1

Alternative 2

Controllable Margin

$137,840

$179,360

Average Operating Assets

$546,700

$669,300

Return on Investment (Controllable Margin / Average Operating Assets x 100)

25.2%

26.8%

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Controllable Margin

Alternative 1

%

Alternative 2

Sales

$557,600

$661,400

Less: Variable Costs

($334,560)

($396,840)

Contribution Margin

$223,040

40.00%

(223,040 / 557,600 x 100)

$264,560

(661,400*40%)

Less: Controllable Fixed Costs

($85,200)

($85,200)

Controllable Margin

$137,840

$179,360

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