The area manager of the Red, White, and Brew Restaurants is considering two possible expansion alternatives. The required investments, expected controllable margins, and the ROIs of each are as follows: $\begin{array}{lllr}\text { Project }&\text { Investment }&\text { Controllable Margin }& \mathrm{RO}\
\text { Phoenix } & \$ 120,000 & \$ 30,000 & 25 \% \
\text { Chicago } & \$ 540,000 & \$ 50,000 & 9.25 \%
\end{array}$ The Red, White, and Brew segment has currently $2,000,000 in invested capital and a controllable margin of $250,000. Which one of following projects will increase the Red, White, and Brew division's ROI?

Question

The area manager of the Red, White, and Brew Restaurants is considering two possible expansion alternatives. The required investments, expected controllable margins, and the ROIs of each are as follows: $\begin{array}{lllr}\text { Project }&\text { Investment  }&\text { Controllable Margin }& \mathrm{RO}\
\text { Phoenix } & \$ 120,000 & \$ 30,000 & 25 \% \
\text { Chicago } & \$ 540,000 & \$ 50,000 & 9.25 \%
\end{array}$ The Red, White, and Brew segment has currently $2,000,000 in invested capital and a controllable margin of $250,000. Which one of following projects will increase the Red, White, and Brew division's ROI?

Quizplus · Accepted Answer

The ROI for the Red, White, and Brew division before any project is $\frac{250,000}{2,000,000} = 12.5\%$. The Phoenix project has a higher ROI (25%) than the division's current ROI, thus it will increase the overall ROI. The Chicago project's ROI is lower (9.25%) than the division's current ROI, so it would decrease the overall ROI.

The Area Manager of the Red, White, and Brew Restaurants