Question
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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 $200,000 with no change in the contribution margin percentage Required a) Calculate the return on investment for 2020 b) Calculate the expected return on investment for each of the alternative courses of action Show all your work
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Expert Solution
Answer 1 : Return on investment = 7%
Explanation:
Calculation of return on investment for 2020.
| Particular | Amount($) |
| 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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