Betsy Union is the Pika Division manager and her performance is evaluated by executive management based on Division ROI. The current controllable margin for Pika Division is $46,000. Its current operating assets total $210,000. The division is considering purchasing equipment for $40,000 that will increase sales by an estimated $10,000, with annual depreciation of $10,000. If the equipment is purchased, what will happen to the return on investment for the division

Pika Division

Betsy Union

The return on investment will reduce from 21.9% to 18.4%.

Explanation:

a) Data and Calculations:

Current controllable margin = $46,000

Current operating assets = $210,000

Current return on investment = $46,000/$210,000 * 100 = 21.9%

Increase in sales as a result of the new equipment = $10,000

Increase in depreciation = $10,000

Operating assets after the purchase of the new equipment = $250,000 ($210,000 + $40,000)

Future controllable margin = $46,000 ($46,000 + $10,000 - $10,000)

Future return on investment = $46,000/$250,000 * 100

= 18.4%

answer; capital structure decision;