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

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