Question

In: Accounting

The Burger Division of Good Meat Company reported the following results for 2020: Sales $800,000 Variable...

The Burger Division of Good Meat Company reported the following results for 2020: Sales $800,000 Variable costs 420,000 Controllable fixed costs 100,000 Average operating assets 4,000,000 Management is considering the following independent alternative courses of action in 2021 in order to maximize the return on investment for the division 1. Reduce controllable fixed costs by 50% with no change in sales or variable costs 2 Reduce average operating assets by 30% with no change in control margin 3. Increase sales $200,000 with no change in the contribution margin percentage Required a) Calculate the return on investment for 2020 b) Calculate the expected return on investment for each of the alternative courses of action Show all your work

Solutions

Expert Solution

Answer 1 : Return on investment = 7%

Explanation:

Calculation of return on investment for 2020.

Particular Amount($)
Sales 800,000
Less : Variable costs 420,000
Contribution margin 380,000
Less : Controllable fixed costs 100,000
Controllable margin 280,000
Average operating assets 4,000,000
Return on investment = (Controllable margin / Average operating assets) = 280,000 / 4,000,000 7 %

Answer 2 :

Alternative 1 : Reduce controllable fixed costs by 50% Alternative 2 : Reduce average operating assets by 30% Alternative 3: Increase sales $200,000
Return on investment 8.25% 10% 9.375% or 9.38%

Explanation:

Alternative 1 : Reduce controllable fixed costs by 50% Alternative 2 : Reduce average operating assets by 30% Alternative 3: Increase sales $200,000
Sales 800,000 800,000 800,000 +200,000) = 1,000,000
Less : Variable costs 420,000 420,000 525,000
Contribution margin 380,000 380,000 (1,000,000 * 47.50%) = 475,000
Contribution margin % (380,000 / 800,000) 47.50 % 47.50 % 47.50 %
Less : Controllable fixed costs (100,000 *50%) = 50,000 100,000 100,000
Controllable margin 330,000 280,000 375,000
Average operating assets 4,000,000

(4,000,000 * 70) = 2,800,000

4,000,000
Return on investment [330,000 / 4,000,000] = 8.25% [280,000 / 2,800,000] = 10% [375,000 / 4,000,000] = 9.375%

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