Sales $4,000,000 Variable costs 3,200,000 Controllable fixed costs 200,000 Average operating assets 3,000,000 Management is considering the following independent alternative courses of action in 2003 in order to maximize the return on investment for the division. 1. Reduce controllable fixed costs by 15% with no change in sales or variable costs. 2. Reduce average operating assets by 20% with no change in controllable margin. 3. Increase sales $600,000 with no change in the contribution margin percentage. Instructions (a) Compute the return on investment for 2002. (b) Compute the expected return on investment for each of the alternative courses of action. Solution 124 (15–20 min.) (a) Controllable margin Return on investment = ———————————— Average operating assets $600,000 2002 ROI = = 20% ————— $3,000,000 $630,000 (a) (b) 1. = 21% —————— $3,000,000 $600,000 2. = 25% ——————— $2,400,000 (b) $720,000 (c) 3. = 24% —————— $3,000,000 (a) $600,000 + ($200,000 × 15%) = $630,000. (b) $3,000,000 ($3,000,000 × .20) = $2,400,000. – $4,000,000 $3,200,000 – (————————————); (c) Contribution margin 20% $4,000,000 $600,000 + ($600,000 × 20%) = $720,000. Ex. 125 Data for the following subsidiaries of Timmons Company which are operated as investment centers are as follows:
Sales $4,000,000 Variable costs 3,200,000 Controllable fixed costs 200,000 Average operating assets 3,000,000 Management is considering the following independent alternative courses of action in 2003 in order to maximize the return on investment for the division. 1. Reduce controllable fixed costs by 15% with no change in sales or variable costs. 2. Reduce average operating assets by 20% with no change in controllable margin. 3. Increase sales $600,000 with no change in the contribution margin percentage. Instructions (a) Compute the return on investment for 2002. (b) Compute the expected return on investment for each of the alternative courses of action. Solution 124 (15–20 min.) (a) Controllable margin Return on investment = ———————————— Average operating assets $600,000 2002 ROI = ————— = 20% $3,000,000 $630,000 (a) (b) 1. —————— = 21% $3,000,000 $600,000 2. ——————— = 25% $2,400,000 (b) $720,000 (c) 3. —————— = 24% $3,000,000 (a) $600,000 + ($200,000 × 15%) = $630,000. (b) $3,000,000 – ($3,000,000 × .20) = $2,400,000. $4,000,000 – $3,200,000 (c) Contribution margin 20% (————————————); $4,000,000 $600,000 + ($600,000 × 20%) = $720,000. Ex. 125 Data for the following subsidiaries of Timmons Company which are operated as investment centers are as follows:
budgetary-control-and-responsibilty-accounting.docx