The area manager of the Little Italy Restaurants is considering two possible expansion alternatives. The required investments, expected controllable margins, and the ROIs of each are as follows: The Little Italy segment has currently $2,000,000 in invested capital and a controllable margin of $250,000. Which one of following projects will increase the Little Italy division's ROI?

Question

The area manager of the Little Italy Restaurants is considering two possible expansion alternatives. The required investments, expected controllable margins, and the ROIs of each are as follows:  The Little Italy segment has currently $2,000,000 in invested capital and a controllable margin of $250,000. Which one of following projects will increase the Little Italy division's ROI?

Quizplus · Accepted Answer

To calculate the ROI for Little Italy prior to any expansion, we divide the controllable margin ($250,000) by the invested capital ($2,000,000):
ROI = $250,000 ÷ $2,000,000 = 12.5%

To calculate the impact of each expansion option on ROI, we need to determine the incremental controllable margin and incremental invested capital for each option:

For the Charlotte option:
Incremental controllable margin = $140,000
Incremental invested capital = $1,000,000

For the Richmond option:
Incremental controllable margin = $110,000
Incremental invested capital = $800,000

To calculate the ROI with each expansion option, we add the incremental controllable margin to the existing controllable margin and divide by the sum of the incremental invested capital and existing invested capital:

For the Charlotte option:
ROI = ($250,000 + $140,000) ÷ ($2,000,000 + $1,000,000) = 19.33%

For the Richmond option:
ROI = ($250,000 + $110,000) ÷ ($2,000,000 + $800,000) = 16.67%

Therefore, only the Charlotte option would increase Little Italy division's ROI from 12.5% to 19.33%. The Richmond option would increase ROI, but not as much as the Charlotte option.

The Area Manager of the Little Italy Restaurants Is Considering