Solano Company has sales of $800,000, cost of goods sold of $520,000, other oper

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.


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%.))

   a. Company sales and cost of goods sold increase by 40 percent.      

         

       
    b. Operating expenses decrease by $10,000.        
      

                

   c. Operating expenses increase by 10 percent.

                

    d. Average invested assets increase by $450,000.

                

    e. Solano changes its hurdle rate to 17 percent.

        

Return on Investment % Investment Turnover Profit Margin % Residual Income (Loss)

Explanation / Answer

1)

Net income = 800000 - 520000 - 35000 = 245000

Average invested assets = 2350000

ROI = 245000/2350000 *100 = 10.43%

Investment turnover = 800000/2350000 *100 = 34.04%

Profit margin = 245000/800000 *100 = 30.63%

Residual Income = 245000 - 2350000*11% = 245000 - 258500 = (13500)

2)

a)

Increase in net income = 245000*1.40 = 343000

Return on investment = 343000/2350000 *100 = 14.60%

Residual income = 343000 - 2350000*11% = 343000 - 258500 = 84500

b)

Net income = 800000 - 520000 - 25000 = 255000

Return on investment = 255000/2350000 *100 = 10.85%

Residual income = 255000 - 2350000*11% = 255000 - 258500 = (3500)

c)

Operating expense = 35000*1.10 = 38500

Net income = 800000 - 520000 - 38500 = 241500

Return on investment = 241500/2350000 *100 = 10.28%

Residual income = 241500 - 2350000*11% = 241500 - 258500 = (17000)

d)

Average assets= 2350000 + 450000 = 2354500

Return on investment = 245000/2354500 *100 = 10.41%

Residual income = 245000 - 2354500*11% = 245000 - 258995 = 13995

e)

Return on investment = 245000/2350000 *100 = 10.43%

Residual income = 245000 - 2350000*17% = 245000 - 399500 = (154500)

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