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i Chrome File Edit View History Bookmarks People Window Help ??16% D Sun 5:57 PM a?E New Tab YOSEF C ?ezto.mheducation.com/hm.tpx E10-6 Calculating Return on Investment, Residual Income, Determining Effect of Changes in Sales, Expenses, Invested Asset, Hurdle Rate on Each [LO 10-4,10-5] Kaler Company has sales of $1,570,000, cost of goods sold of S825,000, other operating expenses of S238,000, average invested assets of $5,200,000, and a hurdle rate of 12 percent. Required 1. Determine Kaler's return on investment (ROl), investment turnover, profit margin, and residual income. (Do not round your intermediate calculations. Enter your ROl and Profit Margin answer to the nearest whole percentage, (i.e. 0.1234 should be entered as 12%). Round your Investment Turnover answers to 4 decimal places.) Retum on Investment Investment Turnower Profit Margin Residual Income (Loss) 2. Several possible changes that Kaler could face in the upooming year follow. Determine each scenario's impact on Kaler's ROl and residual income. (Note: Treat each scenario independently.) (Enter your ROl percentage answers to 2 decimal places, (Le., 0.1234 should be entered as 12.34%.)) a. Company sales and cost of goods sold increase by 15 peroent Retum on Investment Residual Income (LOGs) b. Operating expenses increase by $91,000. Retum on Investment Residual Income (Loss) c. Operating expenses decrease by 20 percent.Explanation / Answer
Answer of Part 1:
Net Income = Sales – Cost of Goods Sold – Operating Expenses
Net Income = $1,570,000 - $825,000 - $238,000
Net Income = $507,000
a. Return on Investment = Net Income / Average Invested Assets
Return on Investment = $507,000 / $5,200,000
Return on Investment = 9.75%
b. Investment Turnover = Sales / Average invested Assets
Investment Turnover = $1,570,000 / $5,200,000
Investment turnover = 0.30 times
c. Profit Margin = Net Income / Sales *100
Profit Margin = $507,000 / $1,570,000 *100
Profit Margin = 32.30%
d. Expected Income = Average Invested Assets * Hurdle Rate
Expected Income = $5,200,000 * 12%
Expected Income = $624,000
Residual Income (loss) = Expected Income – Net Income
Residual Income (Loss) = $624,000 - $507,000
Residual Income (Loss) =$117,000
Answer of Part 2:
Part A:
New Sales = Current Sales + Increased Sales
New Sales = $1,570,000 + $1,570,000*15%
New Sales = $1,570,000 + $235,500
New Sales = $1,805,500
New Cost of Goods Sold = Current Cost of Goods Sold + Increased Cost of Goods Sold
New Cost of Goods Sold = $825,000 + $825,000*15%
New Cost of Goods Sold = $825,000 + $123,750
New Cost of goods Sold = $948,750
Net Income = New Sales – New Cost of Goods Sold – Operating Expenses
Net Income = $1,805,500 - $948,750 - $238,000
Net Income = $618,750
Return on Investment = Net Income / Average Invested Assets
Return on Investment = $618,750 / $5,200,000
Return on Investment = 11.90%
Residual Income (loss) = Expected Income – Net Income
Residual Income (loss)= $624,000 - $618,750
Residual Income (Loss) = $5,250
Part b:
New Operating Expenses = Current Operating Expenses + Increased Expenses
New Operating Expenses = $238,000 - $91,000
New Operating Expenses = $329,000
Net Income = Sales – Cost of Goods Sold – Operating Expenses
Net Income = $1,570,000 - $825,000 - $329,000
Net Income = $416,000
Return on Investment = Net Income / Average Invested Assets
Return on Investment = $416,000 / $5,200,000
Return on Investment = 8%
Residual Income (loss) = Expected Income – Net Income
Residual Income (loss)= $624,000 - $416,000
Residual Income (Loss) = $208,000
Part C:
New Operating Expenses = Current Operating Expenses - Decreased Operating Expenses
New Operating Expenses = $238,000 - $238,000*20%
New Operating Expenses = $238,000 - $47,600
New Operating Expenses = $190,400
Net Income = Sales – Cost of Goods Sold – Operating Expenses
Net Income = $1,570,000 - $825,000 - $190,400
Net Income = $554,600
Return on Investment = Net Income / Average Invested Assets
Return on Investment = $554,600 / $5,200,000
Return on Investment = 10.67%
Residual Income (loss) = Expected Income – Net Income
Residual Income (loss)= $624,000 - $554,600
Residual Income (Loss) = $69,400
Part D:
New Average Invested Assets = Current Average Invested Assets - Decreased Average Invested Assets
New Average Invested Assets = $5,200,000 - $465,000
New Average Invested Assets = $4,735,000
Expected Income = New Average Invested Assets * Hurdle Rate
Expected Income = $4,735,000 *12%
Expected Income = $568,200
Net Income = Sales – Cost of Goods Sold – Operating Expenses
Net Income = $1,570,000 - $825,000 - $238,000
Net Income = $507,000
Return on Investment = Net Income / Average Invested Assets
Return on Investment = $507,000 / $4,735,000
Return on Investment = 10.71%
Residual Income (loss) = Expected Income – Net Income
Residual Income (loss)= $568,200 - $507,000
Residual Income (Loss) = $61,200
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