PHINTER VERSION BACK Exericse 24-17 The South Division of Wig Company reported t
ID: 340943 • Letter: P
Question
PHINTER VERSION BACK Exericse 24-17 The South Division of Wig Company reported the f Sales Variable costs Controlable fixed costs Average operating assets 2,911,000 1,921,260 602,400 5,055,400 nt is unhapy with the investment centar's return on investment (Ro), It asks the manager of the South Division to submit plans to impro 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 $319,000 with no change in the contribution margin percentage 2. Reduce variable costs by $156,800. 3. Reduce average operating assets by 5%. (a) Compute the return on investment (RO1) for the current year. (Round ROI to 1 decimal place, e.g. 1.5.) (b) using the ROI formula, compute the RO! under each of the proposed courses of action. (Round RoI to 1 decimal place, eg. 1.5.) Return on investment Action 2Explanation / Answer
income statement
Amount
Sales (A)
$2,911,000
Less: Variable cost (B)
$1,921,260
Contribution margin (C=A-B)
$989,740
34%
Less: Fixed costs (D)
$602,400
Net Income (E=C-D)
$387,340
Return on investment = Net profit/Total investment *100
A
ROI = 387,340/5,055,400 *100
7.66%
B
Action 1
IF sales increased by $319,000
Contribution = (2,911,000+319,000)*34%
$1,098,200
Less: Fixed cost
$602,400
Net profit
$495,800
ROI = 495,800/5,055,400 *100
9.81%
Action 2
Reduce variable cost by $156,800
Sales (A)
$2,911,000
Less: Variable cost (B)
$1,764,460
Contribution margin (C=A-B)
$1,146,540
Less: Fixed costs (D)
$602,400
Net Income (E=C-D)
$544,140
ROI = 544,140/5,055,400 *100
10.76%
Action 3
Reduce average operating assets by 5%
Average operating assets = 5,055,400*95%
$4,802,630
ROI = 387,340/4,802,630 *100
8.07%
income statement
Amount
Sales (A)
$2,911,000
Less: Variable cost (B)
$1,921,260
Contribution margin (C=A-B)
$989,740
34%
Less: Fixed costs (D)
$602,400
Net Income (E=C-D)
$387,340
Return on investment = Net profit/Total investment *100
A
ROI = 387,340/5,055,400 *100
7.66%
B
Action 1
IF sales increased by $319,000
Contribution = (2,911,000+319,000)*34%
$1,098,200
Less: Fixed cost
$602,400
Net profit
$495,800
ROI = 495,800/5,055,400 *100
9.81%
Action 2
Reduce variable cost by $156,800
Sales (A)
$2,911,000
Less: Variable cost (B)
$1,764,460
Contribution margin (C=A-B)
$1,146,540
Less: Fixed costs (D)
$602,400
Net Income (E=C-D)
$544,140
ROI = 544,140/5,055,400 *100
10.76%
Action 3
Reduce average operating assets by 5%
Average operating assets = 5,055,400*95%
$4,802,630
ROI = 387,340/4,802,630 *100
8.07%
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