Edmunds Division's operating results include: controllable margin of $150,000, sales totaling $1,200,000, and average operating assets of $500,000. Edmunds is considering a project with sales of $100,000, expenses of $86,000, and an investment of average operating assets of $200,000. Edmunds's required rate of return is 9%. Should Edmunds accept this project?

Question

Quizplus · Accepted Answer

In order to determine whether or not to accept a project, a company must determine the project's return on investment (ROI) and compare that to the company's required rate of return.

First, we can calculate the controllable margin for the project:

Controllable Margin = Sales - Expenses 
Controllable Margin = $100,000 - $86,000 
Controllable Margin = $14,000

Next, we can calculate the ROI for the project:

ROI = Controllable Margin / Investment 
ROI = $14,000 / $200,000 
ROI = 0.07 or 7%

Finally, we can compare the ROI of the project to Edmunds Division's required rate of return of 9%. Since the ROI of the project is less than the required rate of return, Edmunds should not accept the project. Therefore, the answer is B.

Edmunds Division's Operating Results Include: Controllable Margin of $150,000, Sales