Reference: 12-02
The following data are available for the South Division of Redride Products, Inc. and the single product it makes: $$\begin{array} { | l | l | }
\hline \text { Unit selling price } & \$ 20 \
\hline \text { Variable cost per unit } & \$ 12 \
\hline \text { Annual fixed costs } & \$ 280,000 \
\hline \text { Average operating assets } & \$ 1,500,000 \
\hline
\end{array}$$
-How much is the return on the investment?
A)40%.
B)25%.
C)12.5%.
D)20%.

Question

Reference: 12-02
The following data are available for the South Division of Redride Products, Inc. and the single product it makes: $$\begin{array} { | l | l | } 
\hline \text { Unit selling price } & \$ 20 \
\hline \text { Variable cost per unit } & \$ 12 \
\hline \text { Annual fixed costs } & \$ 280,000 \
\hline \text { Average operating assets } & \$ 1,500,000 \
\hline
\end{array}$$
-How much is the return on the investment?
A)40%.
B)25%.
C)12.5%.
D)20%.

Quizplus · Accepted Answer

The return on investment (ROI) is calculated as the Net Operating Income divided by the Average Operating Assets. First, calculate the Net Operating Income: Contribution Margin per Unit = Selling Price per Unit - Variable Cost per Unit = $20 - $12 = $8. Then, to find the total contribution margin, we need the number of units to cover the fixed costs and generate profit, but since that's not provided, we calculate the overall profit margin directly. Assume the business operates above the break-even point; the fixed costs are $280,000. With each unit contributing $8 towards covering fixed costs and profit, the profit can be calculated after covering fixed costs. However, without the total units sold, we directly use operating income for ROI calculation, which is not directly given but implied to be sufficient to cover fixed costs and generate profit. The missing step involves calculating total profit or operating income, which directly affects ROI. Given the data, we cannot accurately calculate the operating income without additional information such as total units sold or total revenue. Therefore, the correct approach involves understanding that ROI = (Operating Income / Average Operating Assets). Without explicit operating income, we look for clues or additional steps that might have been intended to calculate it, such as assuming a certain level of sales or profit. Since we can't do that with the given data, the focus shifts to understanding the formula and recognizing the gap in the provided information. The oversight in the explanation is not addressing the direct calculation of operating income from the given data, leading to an incomplete analysis. To rectify, one would typically calculate operating income as (Total Sales - Variable Costs - Fixed Costs), then divide by the average operating assets. However, without specifics on total sales or units sold, we reach an impasse. The correct answer involves acknowledging this limitation or providing a hypothetical scenario to illustrate the calculation under assumed conditions.

Reference: 12-02 the Following Data Are Available for the South

Reference: 12-02
the Following Data Are Available for the South