Solano Company has sales of $540,000, cost of goods sold of $390,000, other oper

Question

Solano Company has sales of $540,000, cost of goods sold of $390,000, other operating expenses of $52,000, average invested assets of $1,700,000, and a hurdle rate of 7 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, (i.e., 01234 should be entered as 12.34 %.)) a. Company sales and cost of goods sold increase by 30 percent. Return on Investment Residual Income (Loss)

Explanation / Answer

1)   Return on Investment Net profit/Total Investments*100 Calculation of netprofit sales 540000 Less:Cost of goods sold 390000 Gross profit 150000 Less: Other Operating Expenses 52000 Net profit 98000 Average invested assets 119000 Return on investment 82.35294118 Investment turnover 119000 net Profit margin 0.181481481 18.14814815 Residual income 98000 2-A) sales 702000 Less:Cost of goods sold 507000 Gross profit 195000 Less: Other Operating Expenses 52000 Net profit 143000 Average invested assets 1190000 Return on investment 12.01680672 net Profit margin 20.37037037 2-B) Operating expenses decreases by 11500$ sales 540000 Less:Cost of goods sold 390000 Gross profit 150000 Less: Other Operating Expenses 40500 Net profit 109500 Average invested assets 119000 Return on investment 92.01680672 net Profit margin 20.27777778 2-C) Operating expenses increases by 10% sales 540000 Less:Cost of goods sold 390000 Gross profit 150000 Less: Other Operating Expenses 46800 Net profit 103200 Average invested assets 119000 Return on investment 86.72268908 2-D) Average Invested Asset Increases by $320000 sales 540000 Less:Cost of goods sold 390000 Gross profit 150000 Less: Other Operating Expenses 46800 Net profit 103200 Average invested assets 141400 Return on investment 72.9844413 2-E) Change hurdle rate to 13% sales 540000 Less:Cost of goods sold 390000 Gross profit 150000 Less: Other Operating Expenses 46800 Net profit 103200 Average invested assets 221000 Return on investment 46.69683258

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