Exercise 22-17 The South Division of Wilig Company reported the following data f

Question

Exercise 22-17 The South Division of Wilig Company reported the following data for the current year. Sales Variable costs Controllable fixed costs Average operating assets $2,929,000 1,962,430 605,400 4,974,600 Top management is unhappy with the investment centers return on investment (ROl). It asks the manager of the South Divisi 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 $150,400 3, Reduce average operating assets by 5%. (a) Compute the return on investment (ROI) for the current year, (Round ROI to 1 decimal place, e.g. 1.5.) Return on Investment (b) Using the ROI formula, compute the ROI under each of the proposed courses of action. (Round ROI to 1 decimal place, e. Return on investment Action 1 Action 2 Action 3

Explanation / Answer

(a) Controllable margin = ($2,929,000 – $1,962,430 – $605,400) = $361,170
ROI = $361,170 / $4,974,600 = 7.3%

(b)1. Contribution margin percentage is 33%, or ($966,570 ÷ $2,929,000)
Increase in controllable margin = $321,000 × 33% = $105,930
ROI = ($361,170 + $105,930) / $4,974,600 = 9.4%

2. ($361,170 + $150,400) / $4,974,600 = 10.3%

3.$361,170 ÷ ($4,974,600 – $248,730) = 7.6%

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