Solano Company has sales of $580,000, cost of goods sold of $410,000, other oper
ID: 2517043 • Letter: S
Question
Solano Company has sales of $580,000, cost of goods sold of $410,000, other operating expenses of $54,000, average invested assets of $1,800,000, and a hurdle rate of 9 percent. Required 1. Determine Solano's return on investment (ROl), investment turnover, profit margin, and residual income. (Do not round your intermediate calculations. Enter your ROl 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.) Return on Investment Investment Turnover Profit Margin Residual Income (Loss) 2. Several possible changes that Solano could face in the upcoming year follow. Determine each scenario's impact on Solano's ROl and residual income. (Note: Treat each scenario independently.) (Enter your Rol percentage answers to 2 decimal places, (ie., 0.1234 should be entered as 12.34%.) a. Company sales and cost of goods sold increase by 30 percent. Return on Investment Residual Income (Loss) b. Operating expenses decrease by $13,500. Return on Investment Residual Income (Loss) c. Operating expenses increase by 10 percent. Return on Investment Residual Income (Loss)Explanation / Answer
1)ROI=NET ICOME/INVESTMENT
NET INCOME=SALES..................................... $ 580,000
LESS:COGS ....................................... $410,000
LESS:OTHER OPERATING EXPENSES............$54,000
NET INCOME.......................................................$116,000
INVESTMENT=$1,800,000
ROI=116000/1800000=6.44%
INVESTMENT TURNOVER=SALES/AVERAGE INVESTED ASSETS=$580,000/$1,800,000=0.32
PROFIT MARGIN=NET INCOME/SALES=$116,000/$580,000=20%
RESIDUAL INCOME=NET INCOME-(AVERAAGE TOTAL ASSETS X HURDLE RATE)
=$116,000-(1,800,000 * 9%)=LOSS (46,000)
2)a)when sales increase by 30% .......................... $580,000+580,000*30%=$754,000
LESS:COGS increase by 30%..................................$410,000+410,000*30%=$533,000
LESS:OTHER OPERATING EXPENSES........................................................$54,000
NET INCOME=................................................................................................$167,000
ROI=$167000/180000=9.28%
RESIDUAL INCOME/(LOSS)=167,000 -(1,800,000*9%)=$5000
b)sales........................................................................$580,000
less:COGS....................................................................$410,000
LESS:Operating expenses decrease by $13,500................$40,500
income.................................................................................$129,500
ROI=129,500/1,800,000=7.19%
RESIDUAL INCOME/(LOSS)=129,500-(1,800,000*9%)=($32,500)
c)sales........................................................................$580,000
less:COGS....................................................................$410,000
LESS:Operating expenses increse by 10%................$59,400
income.................................................................................$110,600
ROI=129,500/1,800,000=6.14%
RESIDUAL INCOME/(LOSS)=110,600-(1,800,000*9%)=($51,400)
d)
NET INCOME=SALES..................................... $ 580,000
LESS:COGS ....................................... $410,000
LESS:OTHER OPERATING EXPENSES............$54,000
NET INCOME.......................................................$116,000
Average Invested Assets increase by $340,000=$1,800,000+$340,000=$2,140,000
ROI=$116,000/$2,140,000=5.42%
RESIDUAL INCOME/(LOSS)=116,000-(2,140,000*9%)=($76,600)
e)
NET INCOME=SALES..................................... $ 580,000
LESS:COGS ....................................... $410,000
LESS:OTHER OPERATING EXPENSES............$54,000
NET INCOME.......................................................$116,000
hurdle rate new=15%
ROI=$116,000/$1,800,000=6.44%
RESIDUAL INCOME/(LOSS)=116,000-(1,800,000*15%)=($154,000)
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