Campbell Company calculated its return on investment as 10 percent. Sales are no
ID: 2512575 • Letter: C
Question
Campbell Company calculated its return on investment as 10 percent. Sales are now $340,000, and the amount of total operating assets is $360,000. **** Can you please assist with part B*****
Required
a. If expenses are reduced by $30,600 and sales remain unchanged, what return on investment will result? (Round your answer to 2 decimal places. (i.e., .2345 should be entered as 23.45).)
b. If both sales and expenses cannot be changed, what change in the amount of operating assets is required to achieve the same result? (Do not round intermediate calculations.
a.
Return on investment
18.50
%
b.
Operating assets must
decrease
By: ???
a.
Return on investment
18.50
%
b.
Operating assets must
decrease
By: ???
Explanation / Answer
Decrease by $1,65,405
The operating assets must be decreased from $360,000 to $1,94,595 which requires a decrease of $1,65,405.
Operating income ÷ Operating assets = ROI
Operating income ÷ $360,000 = 10%
Operating income= Operating assets × ROI
Operating income= $360,000 × 10% = $36,000
New Return on investment = 18.50%
If both sales and expenses cannot be changed, the operating Income would remain at $36,000. To reach the same result of increasing ROI from 10% to 18.5%, the investment base needs to be decreased.
Operating income ÷ Operating assets = ROI
$36,000 ÷ Operating assets = 18.5%
Investment = $36,000 ÷ 18.5%
= $1,94,595(rounded)
The operating assets must be decreased from $360,000 to $1,94,595 which requires a decrease of $1,65,405.
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