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The area manager of the Red, White, and Brew Restaurants is considering two possible expansion alternatives. The required investments, expected controllable margins, and the ROIs of each are as follows:

Project Investment Controllable Margin ROI
Phoenix $120,000 $30,000 25%
Chicago $540,000 $50,000 9.25%

The Red, White, and Brew segment has currently $2,000,000 in invested capital and a controllable margin of $250,000.

Which one of following projects will increase the Red, White, and Brew division’s ROI?

A. Both the Phoenix and Chicago optionsB. Only the Phoenix optionC. Only the Chicago optionD. Neither the Phoenix nor the Chicago options

Respuesta :

Answer:

Option B,only Phoenix option is correct

Explanation:

Firstly,we need to determine the current ROI of the Red,White and Brew Restaurants as shown thus:

ROI=controllable margin/invested capital

controllable margin is $250,000

invested capital is $2,000,000

ROI=$250,000/$2,000,0000=12.5%

Judging from a 12.5% ROI,any project whose ROI is higher than the current one would increase Red,White and Brew division's ROI

In essence Phoenix project would be the appropriate project as it has a higher ROI while Chicago project would be rejected based on a lower ROI.

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