Solano Company has sales of $740,000, cost of goods sold of $490,000, other oper
ID: 2586862 • Letter: S
Question
Solano Company has sales of $740,000, cost of goods sold of $490,000, other operating expenses of $46,000, average invested assets of $2,200,000, 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 ROl 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, (ie, 0.1234 should be entered as 12.34%.) a. Company sales and cost of goods sold increase by 30 percent. Return on Investment Residual Income (Loss) b. Operating expenses decrease by $10,000. Return on Investment Residual Income (Loss)Explanation / Answer
Answer:
sale
740,000
Less: Cost of goods sold
490,000
gross profit
250,000
operating expense
46000
net income
204,000
ROI
= net income /average operating assets
ROI = net income /average operating assets
=204000/2,200,000
9.27%
investment turnover = sales /Average operating assets
740,000/2,200,000
0.34
times
profit margin = net income /sales
=204000/7400000
27.6%
%
Residual income = net income - ( operating assets * hurdle rate)
= 204,000 - (2200,000*10%)
-16000
_____________________________________________________________
a) increase in sales and cost of goods sold by 30%
Sales
962000
cost of goods sold
637000
Gross profit
325000
operating expense
46000
Net income
279000
ROI = 279000/2,20,000 =12.68%
Residual income = 279,000 - (2200,000*10%) = 59,000
____________________________________________________
b)operating expense decrease by 10,000
Cost of goods sold
740,000
Cost of goods sold
490,000
gross profit
250,000
operating expense
36,000
net income
214,000
ROI = 214000/2,200,000 = 9.73%
Residual income = 214000 - 220000 = -6000
________________________________________________________
c
c)operating expense increase by 10%
gross profit
250,000
operating expense
41400
net income
208,600
ROI = 208600/2,200,000 = 9.48%
Residual income =208600 - 220,000 = -11,400
____________________________________________--
D
d)average invested assets increase by 420,000
ROI = 204000/2,620,000*100
7.79%
Residual loss = 204,000 - (2,620,000*10%) = -58,000
______________________________________________
E
new hurdle rate 16%
ROI =
9.27%
Residual loss = 204,000 - (2,200,000*16%)
-148,000
sale
740,000
Less: Cost of goods sold
490,000
gross profit
250,000
operating expense
46000
net income
204,000
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