Required information The following information applies to the questions displaye

Question

Required information The following information applies to the questions displayed below. The following data pertain to British Isles Aggregates Company, a producer of sand, gravel, and cement, for the year just ended. Sales revenue Cost of goods sold Operating expenses Average invested capital E6,400,000 2,100,000 3,660,000 1,600,000 denotes the British pound sterling, the national monetary unit of Great Britain. 2. If the sales and average invested capital remain the same during the next year, to what level would total expenses have to be reduced in order to improve the firm's ROl to 45 percent? Total expenses must be reduced to

Explanation / Answer

Solution:

Current Total Expenses = 2,100,000 + 3,660,000 = 5,760,000

Proposed Expenses (Working Note: 1) = 5,680, 000

Company need to reduce its current expenses of 5,760,000 by 80,000 to reach at 45% ROI.

Working Note 1:

Calculation of Current ROI:

Net Income = Sales revenue – Cost of Goods Sold – Operating Expenses

                   = 6,400,000 – 2,100,000 – 3,660,000

                   = 640,000

Average Invested Capital = 1,600,000

Current ROI: Net Income / Average Invested Capital

= 640,000 / 1,600,000

= 40%

For an additional 5% ROI, Company need to make an extra Net income of 80,000 (1,600,000 * 5%).

Proposed Net Income = 640,000 + 80,000 = 720,000

Keeping the Net Income at a constant level of 6,400,000, total cost required to earn a net income of 720,000 will be 5,680,000 (6,400,000 – 720,000).

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