Ask Question
9 December, 09:12

Dixon Dwellings has sales of $2,800,000. Variable costs are $1,700,000 and controllable fixed costs are $600,000. The company's average operating assets are $5,000,000. Dixon wants to increase their ROI by 1.2%. How much will Dixon have to decrease their fixed and variable costs? A : $80,000 B : $100,000 C : $50,000 D : $60,000

+5
Answers (1)
  1. 9 December, 09:18
    0
    Dixon will have to decrease their fixed and variable costs by $60,000

    Explanation:

    Data provided in the question:

    Sales = $2,800,000

    Variable costs = $1,700,000

    Controllable fixed costs = $600,000

    Company's average operating assets = $5,000,000

    Increase in ROI = 1.2%

    Now,

    Total cost = Fixed cost + Variable cost

    = $1,700,000 + $600,000

    = $2,300,000

    The current ROI = [ {Sales - Total cost } : average operating assets ] * 100%

    = [ { $2,800,000 - $2,300,000} : $5,000,000] * 100%

    = 10%

    Therefore,

    The required ROI = 10% + Increase in ROI

    = 10% + 1.2%

    = 11.2%

    Again applying the ROI formula using the new ROI value, we have

    11.2% = [ {Sales - Required Total cost } : average operating assets ] * 100%

    or

    0.112 = [ { $2,800,000 - Required Total cost } : $5,000,000]

    or

    560,000 = $2,800,000 - Required Total cost

    or

    Required Total cost = $2,240,000

    Now,

    The change in fixed and variable costs = Final total cost - Initial total cost

    = $2,240,000 - $2,300,000

    = - $60,000

    Here,

    negative sign means decrease in fixed and variable costs

    Hence,

    Dixon will have to decrease their fixed and variable costs by $60,000
Know the Answer?
Not Sure About the Answer?
Find an answer to your question 👍 “Dixon Dwellings has sales of $2,800,000. Variable costs are $1,700,000 and controllable fixed costs are $600,000. The company's average ...” in 📗 Business if the answers seem to be not correct or there’s no answer. Try a smart search to find answers to similar questions.
Search for Other Answers