Answer:
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
