Solano Company has sales of $560,000, cost of goods sold of $400,000, other oper

Question

Solano Company has sales of $560,000, cost of goods sold of $400,000, other operating expenses of $53,000, average invested assets of $1,750,000, and a hurdle rate of 8 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 ROI 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.)

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%.))

Explanation / Answer

1 Determine Solano’s return on investment (ROI), investment turnover, profit margin, and residual income Return on investment = net income / Average Assets    *100 =($560,000-$400,000-$53,000) /$1750,000   *100 =6.11% Investment turnover = Sales/Investment =$560,000 /$1750,000 =0.3200 profit margin =Net profit / Sales    *100 =($560,000-$400,000-$53000 ) /560,000 *100 =19.12% residual income /(Loss) = net profit - Hurdle amount   =(560,000-400,000-53000) -( 8%*1750,000) =$107,000-$140,000 = ($33,000) 2 Determine each scenario’s impact on Solano’s ROI and residual income (a) Company sales and cost of goods sold increase by 40 percent return on investment =Net income / Average Assets   *100 =[($560,000-$400,000)*140% -$53,000 ] /$1750,000   *100 =$171,000/1750,000   *100 =9.77% residual Income = net profit - Hurdle amount = [($560,000-$400,000)*140% -$53,000 ] - (8%*1750,000) =$171000-140,000 =$31000 (b) Operating expenses decrease by $12,500 return on investment =Net income / Average Assets   *100 =[$560,000-$400,000-($53,000-12500) ] /$1750,000   *100 =$119500/1750,000   *100 =6.83% residual Income/ (Loss) = net profit - Hurdle amount = [$560,000-$400,000 -($53,000 - 12500) ] - (8%*1750,000) =$94500-$140,000 =($20500) (c )Operating expenses increase by 20 percent. return on investment =Net income / Average Assets   *100 =[$560,000-$400,000-($53,000*120%) ] /$1750,000   *100 =$96400/1750,000   *100 =5.51% residual Income/ (Loss) = net profit - Hurdle amount = [$560,000-$400,000 -($53,000 *120%) ] - (8%*1750,000) =$96400-$140,000 =($43600) (d) Average invested assets increase by $330,000. return on investment =Net income / Average Assets   *100 =[$560,000-$400,000-$53,000 ] /($1750,000+$330,000)   *100 =$107000/2080,000   *100 =5.14% residual Income/ (Loss) = net profit - Hurdle amount = [$560,000-$400,000 -$53,000 ] - (8%*(1750,000+330000) =$107000-$166400 =($59400) (e ) Solano changes its hurdle rate to 14 percent. Return on investment = net income / Average Assets    *100 =($560,000-$400,000-$53,000) /$1750,000   *100 =6.11% residual income /(Loss) = net profit - Hurdle amount   =(560,000-400,000-53000) -( 14%*1750,000) =$107,000-$245,000 = ($138,000)

Related Questions

Navigate

• Browse (All)
• Browse S
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.