The following details of Energy Ltd were extracted from its financial statements

Question

The following details of Energy Ltd were extracted from its financial statements of 2014:
Sales Revenue $980,450 Cost of goods sold $686,315 Operating expense $137,263 Average invested assets $784,360
The company's minimum rate of return is 11.5 percent per annum. In the year 2013, the company's return on investment/ROI was 15 percent.
a] calculate, for the year 2014, the: - company's profit - profit margin - investment turnover - ROI [using DuPont formula] - RI of the company
Comment on the company's performance.
b] in the year 2015, sales volume is expected to drop by 10 percent due to slower demand and gross profit ratio is expected to decrease by 5 percentage point due to higher direct materials cost. Assuming that average invested assets remains the same, calculate the increase or decrease in the amount of the operating expense that would result in a zero RI in the year 2015.

The following details of Energy Ltd were extracted from its financial statements of 2014:
Sales Revenue $980,450 Cost of goods sold $686,315 Operating expense $137,263 Average invested assets $784,360
The company's minimum rate of return is 11.5 percent per annum. In the year 2013, the company's return on investment/ROI was 15 percent.
a] calculate, for the year 2014, the: - company's profit - profit margin - investment turnover - ROI [using DuPont formula] - RI of the company
Comment on the company's performance.
b] in the year 2015, sales volume is expected to drop by 10 percent due to slower demand and gross profit ratio is expected to decrease by 5 percentage point due to higher direct materials cost. Assuming that average invested assets remains the same, calculate the increase or decrease in the amount of the operating expense that would result in a zero RI in the year 2015.


Sales Revenue $980,450 Cost of goods sold $686,315 Operating expense $137,263 Average invested assets $784,360
The company's minimum rate of return is 11.5 percent per annum. In the year 2013, the company's return on investment/ROI was 15 percent.
a] calculate, for the year 2014, the: - company's profit - profit margin - investment turnover - ROI [using DuPont formula] - RI of the company
Comment on the company's performance.
b] in the year 2015, sales volume is expected to drop by 10 percent due to slower demand and gross profit ratio is expected to decrease by 5 percentage point due to higher direct materials cost. Assuming that average invested assets remains the same, calculate the increase or decrease in the amount of the operating expense that would result in a zero RI in the year 2015.

Explanation / Answer

Solution:

a) Computation of company's profit:

Sales Revenue........................ $980,450

Less: Cost of goods sold......... $686,315

Gross profit.............................$294135

Less: Operating expense......... $137,263

Net Profit................................$156872

Computation of profit margin:

Proofit margin= Net profit/ sales = 156872/980450 = 16.0%

Computation of investment turnover:

Investment turnover = Sales/ average invested assets = 980450/784360 = 1.25 times

Computation of RO!:

ROI= Net income/ average invested assets = 156872/784360 = 0.2*100 = 20%

Computation of RI:

RI= Net income - (average invested assets* Minimum rate of return)

= 156872 -(784360*0.115) =$147851.86

Comment:

In 2013, the company's ROI was 15 % but in 2014 it increased by 5 percentage point which indicates that company has performed well in the current year.

Solution:

b) New sales in 2015 = 980450 - (980450*0.10) =882405

Gross Profit ratio for 2014 = 294135/980450 = 30%

Gross profit ratio for 2015 = 30-5 = 25%

Gross profit ratio = (Current gross profit - old gross profit)/ old gross profit

0.25*294135 = Current gross profit - 294135

Current gross profit = $367668.75

Since RI is zero which implies net income = average invested assets* rate of return

Net income = 784360* 0.115 = 90201.4

Operating expenses = Gross profit - net income

= 367668.75-90201.4 = $277467.35

Increase in operating expense = 277467.35 - 137263 =$140204.35

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.