CinRich Corporation recorded operating data for its Waterhole division for the year.CinRich requires a 9% rate of return. $$\begin{array} { l r }
\text { Sales } & \$ 500,000 \
\text { Controllable margin } & 90,000 \
\text { Total average assets } & 300,000 \
\text { Fixed costs } & 30,000 \
\text { Residual income } & 50,000
\end{array}$$ Suppose CinRich experiences an increase of $50,000 in controllable fixed costs.Will the new ROI be acceptable?

Question

CinRich Corporation recorded operating data for its Waterhole division for the year.CinRich requires a 9% rate of return. $$\begin{array} { l r } 
\text { Sales } & \$ 500,000 \
\text { Controllable margin } & 90,000 \
\text { Total average assets } & 300,000 \
\text { Fixed costs } & 30,000 \
\text { Residual income } & 50,000
\end{array}$$ Suppose CinRich experiences an increase of $50,000 in controllable fixed costs.Will the new ROI be acceptable?

Quizplus · Accepted Answer

The new controllable margin would be $40,000 ($90,000 - $50,000). The ROI is calculated as controllable margin divided by total average assets, which is $40,000 / $300,000 = 13.33%. This is still above the required 9% ROI.

CinRich Corporation Recorded Operating Data for Its Waterhole Division for the Year.CinRich