Question

Optimus Company manufactures a variety of tools and industrial equipment. The company operates through three divisions. Each division is an investment center. Operating data for the Home Division for the year ended December 31, 2020, and relevant budget data are as follows.

		Actual		Comparison with Budget
Sales		$1,401,000		$101,000	favorable
Variable cost of goods sold		680,000		55,000	unfavorable
Variable selling and administrative expenses		125,000		26,000	unfavorable
Controllable fixed cost of goods sold		169,000		On target
Controllable fixed selling and administrative expenses		79,000		On target

Average operating assets for the year for the Home Division were $2,000,000 which was also the budgeted amounts

Compute the expected ROI in 2020 for the Home Division, assuming the following independent changes to actual data. (Round ROI to 2 decimal places, e.g. 1.57%.)

				The expected ROI
(1)		Variable cost of goods sold is decreased by 5%.			%
(2)		Average operating assets are decreased by 20.0%.			%
(3)		Sales are increased by $199,000, and this increase is expected to increase contribution margin by $84,000.			%

Answer 1

Answer:

	Return on Investment (ROI)
Action 1	19.10%
Action 2	21.75%
Action 3	21.60%

Calculations:

Return on Investment (ROI) = Net Income / Operating Assets * 100

Present	Proposed
	Total $	Action 1	Action 2	Action 3
Sales	$ 1,401,000	$ 1,401,000	$ 1,401,000	$ 1,600,000
Less: Variable Cost	$    805,000	$    771,000	$    805,000	$    920,000
Contribution	$    596,000	$    630,000	$    596,000	$    680,000
Less: fixed Cost	$    248,000	$    248,000	$    248,000	$    248,000
Net Income (A)	$    348,000	$    382,000	$    348,000	$    432,000
Operating assets (B)	$ 2,000,000	$ 2,000,000	$ 1,600,000	$ 2,000,000
ROI (A/B)	17.40%	19.10%	21.75%	21.60%

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