The South Division of Wiig Company reported the following data for the current y

Question

The South Division of Wiig Company reported the following data for the current year.

Exericse 24-17 Your answer is partially correct. Try again. The South Division of Wiig Company reported the following data for the current year. Sales Variable costs Controllable fixed costs Average operating assets $3,016,000 1,978,496 601,000 5,020,800 Top management is unhappy with the investment center's return on investment (ROI). It asks the manager of the South Division to submit plans to improve ROI in the next year. The manager believes it is feasible to consider the following independent courses of action. 1. Increase sales by $321,000 with no change in the contribution margin percentage. 2. Reduce variable costs by $156,900 3. Reduce average operating assets by 390.

Explanation / Answer

Solution.

Return On Investment = Earnings Before Interest and Tax (EBIT) / Capital Employed

2. Reduce Variable Cost by $156,900.

Staement of EBIT

Return on Investment    = (593,404 / 5,020,800) * 100

= 11.8 %

3. Reduce Average Operating assets by 3%

Revised Average Operating Assets = 5,020,800 - (5,020,800 * 3%)

= 5,020,800 - 150,624

= 4,870,176

Return on Investment = (436,504 / 4,870,176) * 100

= 9%

Particulars Working Amount($) Sales 3,016,000 Less : Variable Cost 1,978,496 - 156,900 1,821,596 Less : Fixed Cost 601,000 EBIT 593,404

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