Solano Company has sales of $600,000, cost of goods sold of $420,000, other oper

Question

Solano Company has sales of $600,000, cost of goods sold of $420,000, other operating expenses of $55,000, average invested assets of $1,850,000, and a hurdle rate of 10 percent Required 1. Determine Solano's return on investment (ROI), investment turnover, profit margin, and residual income. (Do not round your intermediate calculations. Enter your ROI and Profit Margin percentage answer to the nearest 2 decimal places, (i.e, 0.1234 should be entered as 12.34%). Round your Investment Turnover answer to 4 decimal places.) Return on Investment Investment Turnover Profit Margin Residual Income (Loss) 2. Several possible changes that Solano could face in the upcoming year follow. Determine each scenario's impact on Solano's ROI and residual income. (Note: Treat each scenario independently.) (Enter your ROI percentage answers to 2 decimal places, (i.e., 0.1234 should be entered as 12.34%.)) a. Company sales and cost of goods sold increase by 40 percent. Return on Investment Residual Income (Loss)

Explanation / Answer

Solution 1:

Average invested assets = $1,850,000

Return on investment = Operating income / Average invested assets = $125,000 / $1,850,000 = 6.76%

Investment turnover = Sales / Average invested assets = $600,000 / $1850000 = 0.3243 times

Profit margin = Operating income / Sales = $125,000 / $600,000 = 20.83%

Residual income (loss) = Operating income - minimum requried return = $125,000 - ($1,850,000 *10%)

= $125,000 - $185,000 = ($60,000)

Solution 2a:

If sales and COGS increased by 40%, then new operating income:

Return on investment = $197,000 / $1,850,000 = 10.65%

Residual income = $197,000 - $185,000 = $12,000

Solution 2b:

If operating expenses decreased by $14,500

New operating income = $125,000 + $14,500 = $139,500

ROI = $139,500 / $1,850,000 = 7.54%

Residual income (loss) = $139,500 - $185,000 = ($45,500)

Solution 2c:

If operating expense increased by 20% then

New operating income = $125,000 - $55,000*20% = $114,000

ROI = $114,000 / $1,850,000 = 6.16%

Residual income (loss) = $114,000 - $185,000 = ($71,000)

Solution 2d:

Average invested assets increased by $350,000

New Average invested assets = $1,850,000 + $350,000 = $2,200,000

ROI = $125,000 / $2,200,000 = 5.68%

Residual income (loss) = $125,000 - ($2,200,000*10%) = ($95,000)

Solution 2e:

ROI = $125,000 / $1,850,000 = 6.76%

Residual income (loss) = $125,000 - ($1,850,000 * 16%) = ($171,000)

Computation of Operating income Particulars Amount Sales $600,000.00 Cost of goods sold $420,000.00 Gross Profit $180,000.00 Operating expenses $55,000.00 Operating income $125,000.00

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