Delby Industries has manufactured prefabricated houses for over 20 years. The houses are constructed in sections to
Question:
Delby uses return on investment (ROI) as a performance measure with investment defined as average operating assets. Management bonuses are based in part on ROI. All investments are expected to earn a minimum rate of return of 18%. Jensen’s ROI has ranged from 20.1% to 23.5% since it was acquired. Jensen had an investment opportunity in 2014 that had an estimated ROI of 19%. Jensen management decided against the investment because it believed the investment would decrease the division’s overall ROI. Selected financial information for Jensen are presented below. The division’s average operating assets were $12,300,000 for the year 2014.
Jensen Division
Selected Financial Information
For the Year Ended December 31, 2014
Sales ......... $26,000,000
Contribution margin .... 9,100,000
Controllable margin .... 2,583,000
Instructions
(a) Calculate the following performance measures for 2014 for the Jensen Division.
(1) Return on investment (ROI).
(2) Residual income.
(b) Would the management of Jensen Division have been more likely to accept the investment opportunity it had in 2014 if residual income were used as a performance measure instead of ROI? Explain your answer.
Contribution Margin
Contribution margin is an important element of cost volume profit analysis that managers carry out to assess the maximum number of units that are required to be at the breakeven point. Contribution margin is the profit before fixed cost and taxes...
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Related Book For
Managerial Accounting Tools for business decision making
ISBN: 978-1118096895
6th Edition
Authors: Jerry J. Weygandt, Paul D. Kimmel, Donald E. Kieso
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