The area manager of the Steak House Restaurants is considering two possible expansion alternatives.The required investments, expected controllable margins, and the ROIs of each are as follows: The Steak House segment has currently $5,000,000 in invested capital and a controllable margin of $1,500,000.Which one of following projects will increase the Steak House division's ROI?

Question

The area manager of the Steak House Restaurants is considering two possible expansion alternatives.The required investments, expected controllable margins, and the ROIs of each are as follows:  The Steak House segment has currently $5,000,000 in invested capital and a controllable margin of $1,500,000.Which one of following projects will increase the Steak House division's ROI?

Quizplus · Accepted Answer

To calculate the ROI for each option, we need to use the following formula:

ROI = (Controllable Margin / Invested Capital) x 100%

For the current situation, the ROI can be calculated as follows:

ROI = ($1,500,000 / $5,000,000) x 100% = 30%

Now, let's calculate the ROI for each expansion alternative:

- Winnipeg: 
Investment = $2,000,000 
Controllable Margin = $800,000 
ROI = ($800,000 / $2,000,000) x 100% = 40%

- Regina: 
Investment = $3,000,000 
Controllable Margin = $1,100,000 
ROI = ($1,100,000 / $3,000,000) x 100% = 36.67%

As we can see, only the Winnipeg option will increase the Steak House division's ROI (from 30% to 40%). Therefore, the best choice is option B) Only the Winnipeg option.

The Area Manager of the Steak House Restaurants Is Considering