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Company manufactures a variety of tools and industrial equipment
Company manufactures a variety of tools and industrial equipment. The company operates through three divisions. Each division is an investment center. Operating data for the Home Division for the year ended December 31, 2020, and relevant budget data are as follows. Sales Variable cost of goods sold Variable selling and administrative expenses Controllable fixed cost of goods sold Controllable fixed selling and administrative expenses Actual $1,401.000 680.000 126,000 170,000 81.000 Comparison with Budget $100,000 favorable 55,000 unfavorable 24,000 unfavorable On target On target Average operating assets for the year for the Home Division were $2,000,000 which was also the budgeted amount.
Compute the expected ROI in 2020 for the Home Division, assuming the following independent changes to actual data. (Round ROI to 2 decimal places, eg. 1.57%.) The expected ROI (1) Variable cost of goods sold is decreased by 7%. Average operating assets are decreased by 20.0%. % % (2) (3) Sales are increased by $201,000, and this increase is expected to increase contribution margin by $85,000. %
Expert Solution
| Statement showing Net Income | ||
| Sales | 1,401,000 | |
| Less: Variable cost | ||
| Variable cost of goods sold | 680,000 | |
| Variable selling and administrative expense | 126,000 | (806,000) |
| Contribution Margin | 595,000 | |
| Less: Fixed cost | ||
| Fixed cost of goods sold | 170,000 | |
| Fixed selling and administrative expense | 81,000 | (251,000) |
| Net Income | 344,000 |
1. Variable cost of goods sold is decreased by 7%:
Revised Variable cost of goods sold = 680,000 * (100 - 7)% = $632,400
Revised Net Income = Net income + Variable cost of goods sold - Revised cost of goods sold
= 344,000 + 680,000 - 632,400
= $391,600
Operating Assets = $2,000,000
ROI = Net income / Operating Assets
= 391,600 / 2,000,000
= 19.58%
2. Revised Operating Assets = 2,000,000 * (100-20)% = $1,600,000
ROI = Net income / Operating Assets
= 344,000 / 1,600,000
= 21.5%
3. Contribution margin increases by $85,000
Revised Net Income = Net Income + Increase in Contribution margin
= 344,000 + 85,000
= $429,000
ROI = Net income / Operating Assets
= 429,000 / 2,000,000
= 21.45%
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