Baird Company calculated its return on investment as 10 percent. Sales are now $

Question

Baird Company calculated its return on investment as 10 percent. Sales are now $320,000, and the amount of total operating assets is $340,000.

Required

If expenses are reduced by $28,900 and sales remain unchanged, what return on investment will result? (Round your answer to 2 decimal places. (i.e., .2345 should be entered as 23.45).)

If both sales and expenses cannot be changed, what change in the amount of operating assets is required to achieve the same result? (Do not round intermediate calculations. Round your answer to the nearest whole dollar amount.)

a.Return on investment ________ %   

b.Operating assets must  increase or decrease by ________________

Explanation / Answer

Req A: Original sales: $ 320,000 Total operating Assets: $ 340,000 Return on investment: 10% Net Income: $340,000 *10% = $ 34,000 Operating expense: Sales-Net income: 320,000 - 34,000 = $286,000 Now, expense reduced by $28,900 Net income increased by $28900 Net Income: $34000+28900 = $ 62900 Return on investment: Net Income/ Total Operating assets *100 ($ 62900 /340000) *100 = 18.50% Req B: No change in sales and expense, that menas no change in net income. Net income: $ 34000 Required rate of return on investment: 18.50% Therefore Total operating assets required: $ 34000 /18.5*100 = $ 183,784 Operating assets must be decreased by $156,216 (i.e. 340,000 -183,784)

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