Solano Company has sales of $720,000, cost of goods sold of $480,000, other oper

Question

Solano Company has sales of $720,000, cost of goods sold of $480,000, other operating expenses of $45,000, average invested assets of $2,150,000, and a hurdle rate of 10 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 $9,000. c. Operating expenses increase by 20 percent. d. Average invested assets increase by $410,000. e. Solano changes its hurdle rate to 16 percent.

Explanation / Answer

Sales $720,000 Cost of Goods Sold $480,000 Gross Profit $240,000 Other Operating Expenses $45,000 Net income $195,000 Average invested Assets $2,150,000 ROI = Net income/Average invested Assets ROI = 195000/2150000 = 9.07% Investment Turnover = Sales/Average Invested Assets Investment Turnover = 720000/2150000 = 33.4884% Profit Margin= Net Income/ Sales Profit Margin= 195000/720000 = 27.08% Residual income Operating Income- Average invested Assets* Cost of Capital Residual income 195000-2150000*10%= -$20,000 Scenario a Scenario b Scenario c Scenario d Scenario e Sales $1,008,000 $720,000 $720,000 $720,000 $720,000 Cost of Goods Sold $672,000 $480,000 $480,000 $480,000 $480,000 Gross Profit $336,000 $240,000 $240,000 $240,000 $240,000 Other Operating Expenses $45,000 $36,000 $45,000 $45,000 $45,000 Net income $291,000 $204,000 $195,000 $195,000 $195,000 Average invested Assets $2,150,000 $2,150,000 $2,560,000 $2,150,000 $2,150,000 ROI 13.53% 9.49% 7.62% 9.07% 9.07% Residual income $76,000.00 ($11,000.00) ($61,000.00) ($20,000.00) ($149,000.00)

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