Question

The current controllable margin for Henry Division is $93,000. Its current operating assets are $300,000. The division is considering purchasing equipment for $90,000 that will increase annual controllable margin by an estimated $15,000. If the equipment is purchased, what will happen to the return on investment for Henry Division?

Answer 1

Answer:

Return on investment is decreased by 3.30%

Explanation:

The computation of the return on investment is shown below:

=  (Controllable margin ÷ operating assets) × 100

= ($93,000 ÷ $300,000) × 100

= 31%

Now the new controllable margin equals to

= $93,000 + $15,000

= $108,000

And, the new operating assets would be

= $300,000 + $90,000

= $390,000

So, the new return on investment equals to

= ($108,000 ÷ $390,000) × 100

= 27.70%

The return on investment is decreased by

= 31% - 27.70%

= 3.30%