Math  /  Data & Statistics

QuestionFor the year ending December 31, 2022, Cobb Company accumulates the following data for the Plastics Division, which it operates as an investment center: contribution margin $700,000-\$ 700,000 budget, $710,000\$ 710,000 actual; controllable fixed costs $300,000-\$ 300,000 budget, $302,000\$ 302,000 actual. Average operating assets for the year were $2,000,000\$ 2,000,000.
Prepare a responsibility report for the Plastics Division beginning with contribution margin for the year ending December 31, 2022. (Round ROI to 1 decimal place, e.g. 1.5\%.)
COBB COMPANY Plastics Division Responsibility Report

Studdy Solution

STEP 1

What is this asking? We need to create a report card for the Plastics Division, showing how their *actual* performance compared to their *budget*, focusing on how well they used their resources (their *assets*) to make money. Watch out! Don't mix up *contribution margin* and *controllable margin*. *Contribution margin* is revenue minus *variable* costs, while *controllable margin* is *contribution margin* minus *controllable fixed* costs.
Also, remember the *Return on Investment (ROI)* formula!

STEP 2

1. Calculate the Controllable Margin
2. Calculate the Return on Investment (ROI)
3. Prepare the Responsibility Report

STEP 3

Let's **calculate the budgeted controllable margin**!
Remember, controllable margin is how much money the division made *before* considering costs they can't control.
It's the *contribution margin* minus *controllable fixed costs*.
So, we have a budgeted contribution margin of $700,000-\$700{,}000 and budgeted fixed costs of $300,000\$300{,}000.

STEP 4

Therefore, the **budgeted controllable margin** is $700,000$300,000=$1,000,000-\$700{,}000 - \$300{,}000 = -\$1{,}000{,}000.
A negative margin means they were *projected* to lose money!

STEP 5

Now, let's look at what *actually* happened.
The **actual contribution margin** was $710,000\$710{,}000 and the **actual controllable fixed costs** were $302,000\$302{,}000.

STEP 6

So, the **actual controllable margin** is $710,000$302,000=$408,000\$710{,}000 - \$302{,}000 = \$408{,}000.
Wow, they turned things around and made a profit!

STEP 7

*Return on Investment (ROI)* tells us how effectively the division used its assets to generate profit.
It's calculated as *Controllable Margin* divided by *Average Operating Assets*.
The **average operating assets** were $2,000,000\$2{,}000{,}000.

STEP 8

The **budgeted ROI** is $1,000,000$2,000,000=0.5\frac{-\$1{,}000{,}000}{\$2{,}000{,}000} = -0.5, or **-50.0%**.
Yikes, that's a big loss relative to their assets.

STEP 9

The **actual ROI** is $408,000$2,000,000=0.204\frac{\$408{,}000}{\$2{,}000{,}000} = 0.204, or **20.4%**.
That's a fantastic turnaround!

STEP 10

Now, let's put all this together into a neat report!

STEP 11

``` COBB COMPANY Plastics Division Responsibility Report For the Year Ended December 31, 2022
Budget Actual Difference Contribution Margin $700,000-\$700,000 $710,000\$710,000 $1,410,000\$1,410,000 Controllable Fixed Costs $300,000-\$300,000 $302,000-\$302,000 $2,000-\$2,000 Controllable Margin $1,000,000-\$1,000,000 $408,000\$408,000 $1,408,000\$1,408,000 Average Operating Assets $2,000,000\$2,000,000 $2,000,000\$2,000,000 $0\$-0- Return on Investment 50.0%-50.0\% 20.4%20.4\% 70.4%70.4\% ```

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