Kaler Company has sales of $1,430,000, cost of goods sold of $790,000, other ope

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

Sales 1430000 cost of goods sold 790000 Gross Margin 640000 other operating expenses 203000 Net Income 437000 Charge for use of capital 4500000*.12 540000 Residual Income -103000 ROI = Net income / Average operating assets 9.71% investment turnover =Sales /average invested assets 0.31778 Profit Margin Ratio =Net Income /Sales 30.56% a. Company sales and cost of goods sold increase by 10 percent. Sales 1573000 cost of goods sold 869000 Gross Margin 704000 other operating expenses 203000 Net Income 501000 Charge for use of capital 4500000*.12 540000 Residual Income -39000 ROI = Net income / Average operating assets 11.13% b. Operating expenses increase by $84,000. Sales 1430000 cost of goods sold 790000 Gross Margin 640000 other operating expenses 287000 Net Income 353000 Charge for use of capital 4500000*.12 540000 Residual Income -187000 ROI = Net income / Average operating assets 7.84% C Operating expenses decrease by 20 percent Sales 1430000 cost of goods sold 790000 Gross Margin 640000 other operating expenses 162400 Net Income 477600 Charge for use of capital 4500000*.12 540000 Residual Income -62400 ROI = Net income / Average operating assets 10.61% d. Average invested assets decrease by $395,000 Sales 1430000 cost of goods sold 790000 Gross Margin 640000 other operating expenses 203000 Net Income 437000 Charge for use of capital 4105000*.12 492600 Residual Income -55600 ROI = Net income / Average operating assets 10.65% . Kaler changes its hurdle rate to 9 percent Sales 1430000 cost of goods sold 790000 Gross Margin 640000 other operating expenses 203000 Net Income 437000 Charge for use of capital 4500000*.12 405000 Residual Income 4500000*.09 32000 ROI = Net income / Average operating assets 9.71%

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