Solano Company has sales of $800,000, cost of goods sold of $520,000, other oper
ID: 2532319 • Letter: S
Question
Solano Company has sales of $800,000, cost of goods sold of $520,000, other operating expenses of $35,000, average invested assets of $2,350,000, and a hurdle rate of 11 percent. 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%.)) 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.
Explanation / Answer
Existing ROI and Residual Income
Net Operating Income = $800000 - $520000 - $35000 = $2,45,000
Average invested assets = $23,50,000
ROI = (Net Operating Income / Average invested assets) x 100
= $2,45,000/$23,50,000)x100
= 10.43%
Residual Income = Net Operating Income – (Average invested assets x Hurdle Rate)
= $245000 – ($23,50,000 x 11%)
= $245000 - $ 258500
= ($13500) Negative
Scenario A - Company sales and cost of goods sold increase by 40 percent.
New Net Operating Income= ($800000 x 140%) -( $520000 x 140%) - $35000
= $1120000 - $728000 - $35000
= $3,57,000
Average invested assets = $23,50,000
New ROI = (Net Operating Income / Average invested assets) x 100
= ($3,57,000 / $23,50,000) x 100
= 15.19%
New Residual Income= Net Operating Income – (Average invested assets x Rate) Rate)
= $357000 – ($23,50,000 x 11%)
= $357000 - $ 258500
= $98,500
Conclusions
Company sales and cost of goods sold increase by 40 percent , Then the Company’s ROI increased from 10.43% to 15.19% and Residual Income turned out to $98,500 from ($13500)
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