Kaler company nas saies of dollar.1,410,000. cost of goods sold of dollar 785,00
ID: 2465175 • Letter: K
Question
Kaler company nas saies of dollar.1,410,000. cost of goods sold of dollar 785,000 other operating expenses ot dollar 198,000, average invested assets of dollar 4,400,000, and a hurdle rate of 11 percent Required: Determine Kaler's return on investment (ROI), investment turnover, profit margin, and residual income (Loss amount should be indicated by a minus sign. Do not round your intermediate calculations. Round your "Investment Turnover" answer to 4 decimal places and "Return on Investment" & "Profit Margin" answer to 2 decimal places.) Several possible changes that Kaler could face in the upcoming year follow. Determine each scenario's impact on Kaler's ROI and residual income. (Note: Treat each scenario independently.) Company sales and cost of goods sold increase by 5 percent (Loss amount should be indicated by a minus sign. Do not round your intermediate calculations. Round your "Return on Investment" answer to 2 decimal places.) Operating expenses increase by dollar83.000. (Loss amount should be indicated by a minus sign. Do not round your intermediate calculations. Round your "Return on Investment" answer to 2 decimal places.) Operating expenses decrease by 10 percent (Loss amount should be indicated by a minus sign. Do not round your intermediate calculations. Round your "Return on Investment" answer to 2 decimal places.) Average invested assets decreased by dollar385, 000(Loss amount should be indicated by a minus sign. Do not round your intermediate calculations. Round your "Return on Investment" answer to 2 decimal places.) Kaler changes its hurdle rate to 8 percent (Loss amount should be indicated by a minus sign. Do not round your intermediate calculations. Round your "Return on Investment" answer to 2 decimal places.)Explanation / Answer
Return on Investment= Net Profit/Average Investment
Net Profit= $1410000-$785000-$198000
=$427000
Return on Investment= 427000/4400000
=9.70%
Investment Turnover= Turnover/Average Investment
=14,10,000/44,00,000
=0.32
Residual Income =Net Profit-Rquired Profit
Required Profit=Investment amount*Hurdle Rate
=$484000
Residual income= $427000-$484000
=-$57000
2-a
Sale and Cost of goods sold increase by 5%
Sale= $1480500
Cost of Sales= $824250
Gross Profit= $656250
Operating expense= 198000
Net Profit $458250
Return on Investment= $458250/$4400000
=10.41%
Residual Income = $458250-484000
=-$257502
2-b Operating expense increase by $83000
Net Profit will decrease by $83000 so Net Profit will be $427000-83000=$344000
Return on Investment= $344000/4400000
=7.82%
residual income= $344000-$484000
=-$140000
If Operating expense decrease by 10% the operating expenses will be $178200 so the Net Profit will be 446800
Return on Investment= $446800/$4400000
=10.15%
Residual income=$446800-$484000
=$37200
2-d Average Investment decrease by $385000 so Average Investment= $40,15000
Return on Investment= $427000/$40,15000
=10.64%
Residual income= $427000-($4015000*11%)
=$427000-$441650
=-$14650
2-e Return on Investment will be the same of 9.70%
Residual income= 427000-(4400000*8%)
=$427000-$352000
=$75000
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