Question
In: Accounting
The service division of Raney Industries reported the following results for 2020. Sales $533,000 Variable costs...
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Expert Solution
Sales = $533,000
Variable cost = $319,800
Controllable fixed costs = $95,120
Average operating assets = $656,000
1.
Controllable margin = Sales - Variable cost - Controllable fixed costs
= 533,000 - 319,800 - 95,120
= $118,080
Reduction in Average operating assets = $183,680
Average operating assets after reduction = Average operating assets - Reduction in Average operating assets
= 656,000 - 183,680
= $472,320
Return on investment = Controllable margin/Average operating assets after reduction
= 118,080/472,320
= 25%
2.
Ratio of variable cost to sales = Variable cost/Sales
= 319,800/533,000
= 60%
Increase in sales = $147,600
New sales = Sales + Increase in sales
= 533,000 + 147,600
= $680,600
New Variable cost = New sales x 60%
= 680,600 x 60%
= $408,360
Controllable margin = Sales - Variable cost - Controllable fixed costs
= 680,600 - 408,360 - 95,120
= $177,120
Rreturn on investment = Controllable margin/Average operating assets
= 177,120/656,000
= 27%
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