Solano Company has sales of $840,000, cost of goods sold of $540,000, other oper

Question

Solano Company has sales of $840,000, cost of goods sold of $540,000, other operating expenses of $70,000, average invested assets of $2,450,000, and a hurdle rate of 11 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.)
Return on Investment Turnover= __%

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 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.      

Return on Investment= __ %

Residual Income (Loss)=  

         
       
    b. Operating expenses decrease by $12,000.        
      
       

Return on Investment= __ %

Residual Income (Loss)=  

         

   c. Operating expenses increase by 10 percent.

         

Return on Investment= __ %

Residual Income (Loss)=  

       

    d. Average invested assets increase by $470,000.

Return on Investment= __ %

Residual Income (Loss)=  

                

    e. Solano changes its hurdle rate to 17 percent.

Return on Investment= __ %

Residual Income (Loss)=

Explanation / Answer

Solution:

Part 1 ---

Return on Investment = Operating Income / Average Invested Assets x 100

Operating Income = Sales 840,000 – COGS 540,000 – Operating Expense 70,000 = $230,000

Return on Investment = Operating Income 230,000 / Average Invested Assets 2,450,000 x 100

= 9.39%

Investment Turnover = Sales / Average Invested Assets = 840,000 / 2,450,000 = 0.34

Profit Margin = Operating Profit / Net Sales x 100

= 230,000 / 840,000 x 100

= 27.38%

Residual Income (loss) = Operating Profit – (Average Invested Assets x Hurdle Rate)

= 230,000 – (2,450,000*11%)

= 230,000 – 269,500

= ($39,500)

Part 2(a) ---

Upcoming Year Sales = 840,000 * 140% = $1,176,000

COGS = 540,000*140% = 756,000

Net Income = 1,176,000 – 756,000 – 70,000 = $350,000

Return on Investment = Net Income / Average Invested Asset x 100

= 350,000 / 2,450,000 x 100

= 14.29%

Residual Income (loss) = Net Income – Minimum Required Return as calculated in part 1

= 350,000 – 269,500

= $80,500

Part 2(b) – Operating Expenses decrease by $12,000

Net Income = 230,000 + Decrease in Operating Exp 12,000 = $242,000

Return on Investment = Net Income 242,000 / Average Invested Asset 2,450,000 x 100

= 9.88%

Residual Income (loss) = Net Income 242,000 – Minimum required return 269,500 = ($27,500)

Part 2(c) –

Net Income = $230,000 – Operating Expense Increase 70,000*10% = 223,000

Return on Investment = Net Income 223,000 / Average Invested Asset 2,450,000 x 100 = 9.10%

Residual Income (loss) = Net Income 223,000 – Minimum required return 269,500 = ($46,500)

Hope the above calculations, working and explanations are clear to you and help you in understanding the concept of question.... please rate my answer...in case any doubt, post a comment and I will try to resolve the doubt ASAP…thank you

Pls ask separate question for remaining parts

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