Betsy Union is the Pika Division manager and her performance is evaluated by executive management based on Division ROI. The current controllable margin for Pika Division is $46000. Its current operating assets total $210000. The division is considering purchasing equipment for $40000 that will increase sales by an estimated $10000 with annual depreciation of $10000. If the equipment is purchased what will happen to the return on investment for the division?
A) An increase of 0.5%
B) A decrease of 0.5%
C) A decrease of 3.5%
D) It will remain unchanged.

Question

Quizplus · Accepted Answer

The current ROI is calculated as $46,000 / $210,000 = 21.9%. After purchasing the equipment, the new controllable margin remains the same ($46,000 - $10,000 depreciation + $10,000 additional sales = $46,000), but the operating assets increase to $250,000 ($210,000 + $40,000). The new ROI is $46,000 / $250,000 = 18.4%. The change in ROI is a decrease of 3.5% (21.9% - 18.4%).

Betsy Union Is the Pika Division Manager and Her Performance