The South Division of Bonita Company reported the following data for the current year. Sales $3,000,000...

The South Division of Bonita Company reported the following data for the current year. Sales $3,000,000 Variable costs 1,980,000 Controllable fixed costs 600,000 Average operating assets 5,000,000 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 $300,000 with no change in the contribution margin percentage. 2. Reduce variable costs by $155,000. 3. Reduce average operating assets by 3%. (a) Compute the return on investment (ROI) for the current year. (Round ROI to 2 decimal places, e.g. 1.57%.) Return on Investment Entry field with incorrect answer % (b) Using the ROI formula, compute the ROI under each of the proposed courses of action. (Round ROI to 2 decimal places, e.g. 1.57%.)

Return on investment Action 1 Entry field with incorrect answer % Action 2 Entry field with incorrect answer % Action 3 Entry field with incorrect answer %

Expert Solution

a)

	CURRENT YEAR	%
Sales	3000000	100%
lesS:variable cost	-1980000	1980000/3000000=66%
contribution margin	1020000	34%
less:controllable fixed cost	-600000
Controllable margin /Net operating income	420000

Return on investment =Net operating income / Average operating assets

= 420000/5000000

= .084 or 8.4%

b)

	Action 1	2	3
Sales	3000000+300000= 3300000	3000000	3000000
Variable cost	3300000*66%= 2178000	1980000-155000=1825000	-1980000
contribution margin	1122000	1175000	1020000
Fixed cost	600000	600000	-600000
Controllable margin /Net operating income [1]	522000	575000	420000
Average operating asset [2]	5000000	5000000	5000000(1-.03)=4850000

ROI [1/2]	10.44%`	11.5%	8.66%

ekkarill92 answered 2 years ago

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