Question 3 Return on Investment Analysis25 marks

Funky Buddha Brewery is a regional brewery.The Operations Manager has the authorization to make investment decisions as needed and is evaluated on return on investment (ROI).

Funky Buddha Brewery reported the following results for the year:

Sales $600 000

Operating Income $15 000

Average Operating Assets $70 000

Required:

1.(3 marks) Compute the brewery's ROI.

2. (15 marks) Here are three (3) individual situations. Solve each separately.

1.Assume the Operations Manager can increase sales by $ 80 000 and as a result operating income increases by $10 000.Further assume this is possible without any increase in operating assets.What would be the brewery's ROI?

2.Assume the Operations Manager can reduce expenses by $ 5000, without any change in sales or operating assets.What would be the brewery's ROI?

3. Assume the Operations Manager can reduce the operating assets by $20 000 without any change in sales or operating income.What would be the brewery's ROI?

3.(3 marks) From the three independent scenarios, which would you select and why?

4.(4 marks) What are three (3) disadvantages of using ROI?