m on LO 10-4, 10-5 Solano Company has sales of $780,0oo, cost of goods soid of $

Question

m on LO 10-4, 10-5 Solano Company has sales of $780,0oo, cost of goods soid of $10.000 dver operating excpenses of $8,000,average i invested assets of $2,300,000, and a hurdle rate of 12 percent nvestment bumover, proft margin, and residual income. (Do not round your intermediate caleulations. Enter your ROl and Proft Margin percentage answer to the nearest 2 decinal paces Le 1234 shesid be enti ed it 1234%). Round your Investr ant Turnover answer to 4 deci al places 2. Several possibile changes that Solano could face in the upcoming year follow Determine each scenario s impact on Solano's RCi and residual income, (Ncte Treat each scenario independen) Enter your Roi percentage answers to 2 decimal places, (?A, 01234 should be ordered as 12.34%3) a. Company sales and cost of goods sold increase by 30 percent 2 3

Explanation / Answer

1) Income Statment :-

Return on Investment (ROI) = Net Income / Average Invested Assets

= $232000 / $2300000

= 10.09%

Investment Turnover = Sales / Average Invested Assets

= $780000 / $2300000

= 33.91%

Profit Margin = Net Income / Sales

= $232000 / $780000

= 29.74%

Residual Income(RI) = Net income - (Operating Assets * Hurdle Rate)

= $232000 - ($2300000 * 12%)

= $232000 - $276000

= ($44000)

2a). Income Statement :-

ROI = $313000 / $2300000

= 13.61%

RI = $313000 - ($2300000*12%)

= $313000 - $276000

= $37000

2b) Income Statment :-

ROI = $244000 / 2300000

= 10.61%

RI = $244000 - ($2300000*12%)

= $244000 - 276000

= ($32000)

2c) Income Statment :-

ROI = $228200 / $2300000

= 9.92%

RI = $228200 - $276000

= $47800

2d) Average Invested Assets = $2300000 + $440000 = $2740000

ROI = $232000 / $2740000

= 8.47%

Ri = $232000 - ($2740000*12%)

= $232000 - 328800

= ($96800)

2e). ROI = $232000 / $2300000

= 10.09%

RI = $232000 - ($2300000*18%)

= $232000 - $414000

= ($182000)

Particulars Amount ($) Sales 780000 Less : Cost of goods Sold (510000) Gross Profit 270000 Less : Operating Expenses (38000) Net Income 232000

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