Kaler Company has sales of $1,430,000, cost of goods sold of $790,000, other ope
ID: 2468019 • Letter: K
Question
Kaler Company has sales of $1,430,000, cost of goods sold of $790,000, other operating expenses of $203,000, average invested assets of $4,500,000, and a hurdle rate of 12 percent. Required: 1. 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.) 2. 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.) a. Company sales and cost of goods sold increase 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.) b. Operating expenses increase by $84,000. (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.) c. Operating expenses decrease by 20 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.) d. Average invested assets decrease by $395,000. (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.) e. Kaler changes its hurdle rate to 9 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
profit = 1.43 - 0.79 -.203 = 0.437 million
Return on investment = 0.437/4.5 = 9.71%
Investment turnover = 1.43 / 4.5 = 0.3178
Profit Margin = 0.437 / 1.43 = 30.56%
Residual Income = 0.437 - (4.5 * 12%) = - 0.103 million
2. impact on Kaler’s ROI and residual income:
a) Company sales and cost of goods sold increase by 10 percent
Sales = 1.43 * 1.1 = 1.573 million
COGS= 0.79 * 1.1 = 0.869 million
profit = 1.573 - 0.869 - 0.203 = 0.501 million
Return on investment = 0.501/4.5 = 11.13%
Residual Income = 0.501 - (4.5 * 12%) = - 0.039 million
b) Operating expenses increase by $84,000
profit = 1.43 - 0.79 -.287 = 0.353 million
Return on investment = 0.353/4.5 = 7.84%
Residual Income = 0.353 - (4.5 * 12%) = - 0.187 million
c) Operating expenses decrease by 20 percent
profit = 1.43 - 0.79 - 0.1624 = 0.4776 million
Return on investment = 0.4776/4.5 = 10.61%
Residual Income = 0.4776 - (4.5 * 12%) = - 0.0624 million
d) Average invested assets decrease by $395,000
profit = 1.43 - 0.79 -.203 = 0.437 million
Return on investment = 0.437/4.105 = 10.65%
Residual Income = 0.437 - (4.105 * 12%) = - 0.0556 million
e) Kaler changes its hurdle rate to 9 percent
profit = 1.43 - 0.79 -.203 = 0.437 million
Return on investment = 0.437/4.5 = 9.71%
Residual Income = 0.437 - (4.5 * 9%) = 0.032 million
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