Which of the two options will the manager implement for this year to improve his ROI?
Variance Analysis
In layman's terms, variance analysis is an analysis of a difference between planned and actual behavior. Variance analysis is mainly used by the companies to maintain a control over a business. After analyzing differences, companies find the reasons for the variance so that the necessary steps should be taken to correct that variance.
Standard Costing
The standard cost system is the expected cost per unit product manufactured and it helps in estimating the deviations and controlling them as well as fixing the selling price of the product. For example, it helps to plan the cost for the coming year on the various expenses.
Division G of a large company is approaching its year end. The division is evaluated using ROI with a target
The divisional manager is considering the following options.
1. (i) To delay payment of a supplier until next year, the potential prompt payment discount of 5% will be lost. The debt is for $27,500.
2. (ii) To scrap a redundant asset with a book value of $147,000. The manager has been offered $15,000 as immediate scrap proceeds, whilst he is fairly confident that he could get $25,000 in an industry auction to be held at the start of the new year.
Assume that the manager is very short‐termist (i.e. only considers the implications for this year) and that the expected ROI for the year, before these options, is 18%. Which of the two options will the manager implement for this year to improve his ROI?
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