The current controllable margin for Frederick Division is $62,000. Its current operating assets are $200,000. The division is considering purchasing equipment for $60,000 that will increase annual controllable margin by an estimated $10,000. If the equipment is purchased, what will happen to the return on investment for Frederick Division?

Question

Quizplus · Accepted Answer

Current ROI = Controllable Margin/Operating assets = $62,000/$200,000 = 31%
If equipment is purchased:
New Controllable Margin = $62,000 + $10,000 = $72,000
New Operating assets = $200,000 + $60,000 = $260,000
New ROI = $72,000/$260,000 = 27.7%
Therefore, the ROI will decrease by 3.3%. The correct answer is C.

The Current Controllable Margin for Frederick Division Is $62,000