The current controllable margin for Henry Division is $93000. Its current operating assets are $300000. The division is considering purchasing equipment for $90000 that will increase annual controllable margin by an estimated $15000. If the equipment is purchased what will happen to the return on investment for Henry Division?
A) An increase of 16.1%
B) A decrease of 13.3%
C) A decrease of 3.3%
D) A decrease of 7.2%

Question

Quizplus · Accepted Answer

Return on Investment (ROI) is calculated as Controllable Margin divided by Operating Assets.

Current ROI for Henry Division = $93000 / $300000 = 0.31 or 31%

If the division purchases the equipment, the new Controllable Margin will be $93000 + $15000 = $108000. Operating Assets will increase by $90000 to $390000.

New ROI = $108000 / $390000 = 0.277 or 27.7%

Therefore, ROI will decrease by (31% - 27.7%) = 3.3%.

Hence, option C is the correct answer.

The Current Controllable Margin for Henry Division Is $93000