Problem 2 COMPUTATION OF RETURN ON INVESTMENT (ROI)

For the year ended December 31, 2017, Reese Company reports the following:

Sales $6,000,000

Variable costs 3,200,000

Controllable fixed costs 2,000,000

Average operating assets 5,000,000

Instructions: Compute ROI for each of the following situations. Show all computations.

1. For the year ended December 31, 2017.

2. For 2018 assuming the following independent courses of action:

(a) Sales will increase 10% with no change in the contribution margin ratio.

(b) Variable costs and controllable fixed costs will both be reduced 10%.

(c) Average operating assets will be reduced 20%.

SOLUTION

1. $800,000/$5,000,000 = 16% Sales $6,000,000

Var costs 3,200,000

2. Contribution margin 2,800,000

(a) Controllable FC 2,000,000

Sales 6,600,000 Controllable margin $ 800,000

Var costs

Cont margin 3,080,000 rounded ($6.6m *46.6667%) CM ratio=$2.8m / $6m =46.6667%

Controllable FC 2,000,000

Controllable M 1,080,000 $1,080,000 / $5000,000 = 21.6%

(b) Sales $6,000,000

Var costs - 2,880,000

Contribution margin 3,120,000

Fixed costs - 1,800,000 $1320,000 / $500,000 26.4%

Controllable margin $1,320,000

(c) $800,000/($5,000,000 - $1,000,000) = 20%

Controllable Costs -Costs that can be influenced or changed by management. Only focus on controllable costs in making decisions (non-controllable costs will be the same regardless of your decision)