The following information is available about the status and operations of VTS Company, which has a required ROI of 15% and discount rate of 12%: Division A Division B Divisional Investment P 500,000 P 1,250,000 Divisional Profit P 350,000 P 625,000 Variable Cost P 500,000 P 3,500,000 Divisional Sales P1, 500,000 P 5,500,000 Division B could reduce its investment so that its asset turnover increased by two, while total sales increased by 10%. Compute its ROI. Division C is being considered to be added. This would require additional investment of P750,000. Upon addition of this new division, the ROI for all the company’s operations shall become 40%. What is the income or loss associated with the new investment? If the manager of the division is evaluated on ROI alone, will the company invest on the new project?
Cost-Volume-Profit Analysis
Cost Volume Profit (CVP) analysis is a cost accounting method that analyses the effect of fluctuating cost and volume on the operating profit. Also known as break-even analysis, CVP determines the break-even point for varying volumes of sales and cost structures. This information helps the managers make economic decisions on a short-term basis. CVP analysis is based on many assumptions. Sales price, variable costs, and fixed costs per unit are assumed to be constant. The analysis also assumes that all units produced are sold and costs get impacted due to changes in activities. All costs incurred by the company like administrative, manufacturing, and selling costs are identified as either fixed or variable.
Marginal Costing
Marginal cost is defined as the change in the total cost which takes place when one additional unit of a product is manufactured. The marginal cost is influenced only by the variations which generally occur in the variable costs because the fixed costs remain the same irrespective of the output produced. The concept of marginal cost is used for product pricing when the customers want the lowest possible price for a certain number of orders. There is no accounting entry for marginal cost and it is only used by the management for taking effective decisions.
The following information is available about the status and operations of VTS Company, which has a required ROI of 15% and discount rate of 12%:
|
|
Division A |
Division B |
|
Divisional Investment |
P 500,000 |
P 1,250,000 |
|
Divisional Profit |
P 350,000 |
P 625,000 |
|
Variable Cost |
P 500,000 |
P 3,500,000 |
|
Divisional Sales |
P1, 500,000 |
P 5,500,000 |
- Division B could reduce its investment so that its asset turnover increased by two, while total sales increased by 10%. Compute its ROI.
- Division C is being considered to be added. This would require additional investment of P750,000. Upon addition of this new division, the ROI for all the company’s operations shall become 40%. What is the income or loss associated with the new investment?
- If the manager of the division is evaluated on ROI alone, will the company invest on the new project? Why?
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