Kaler Company has sales of $1,230,000 cost of goods sold of $740,000 other opera

Question

Kaler Company has sales of $1,230,000 cost of goods sold of $740,000 other operating exspenses of $153,000 average invested assets of 3,500,000 and a hurdle rate of 12%.

Q1: Determine kaler's return on investment (ROi) investment turn over, profit margin, and residual income.

Return on Investment: ?%, Investment turnover: ?, Profit margin: ?%, Residual income(loss): ?

Q2: Several possible changes that Kaler could face in the upcoming year follow. Determine each scenaro's impact on Kaler's ROi and residual income.(treat each scenario independently.)

2A: Company sales and COG's increase by 10%. (Return on investment: ?%) Residual income(loss): ?

2B: Operating exspenses increase by $74,000 (Return on investment: ?%) Residual income(loss): ?

2C: Operating exspenses decrease by 20% (Return on investment: ?%) residual income(loss): ?

2D: Average invested assets decrease by $ 295,000 (Return on investment: ?%) Residual income(loss): ?

2E: Kaler changes its hurdle rate to 9 % (return on investment: ?%) Residual income(loss): ?

Explanation / Answer

Ans. 1 Sales                                   $1230000

COGS                                            $740000

Operating Exp.                              $153000

Op. Income                                   $337000

ROI                         = 337000/3500000 = 9.63%

Profit Margin           = 337000/1230000 = 27.40%

Normal Return    = 3500000X12% = $420000

Residual Loss        = 337000-420000 = ($83000)

2A Revised COGS = (740000X1.10) = $814000

Profit = $1230000-$814000-153000 =$263000

ROI = 263000/3500000 = 7.51%

Residual income = $263000-$420000 = ($157000)

2B Operating Exp. (153000+74000) = $227000

Profit = 1230000-740000-227000 = $263000

ROI = 7.51%

Residual income/loss = ($157000)

2C Operating Exp.= 153000X.80 = $122400

Profit = $1230000-740000-122400 = $367600

ROI = $367600/3500000 = 10.50%

Residual income/ (Loss) = $367600-3500000 = ($52400)    

2D Revised Average Assets = (3500000-295000) =$3205000

ROI = $337000/3205000= 10.51%

Normal Return = (3500000X12%) = $384600

Residual income    = ($337000-384600) = ($47600)

2E Revised Hurdle Rate = 9%

Normal Return = (3500000X9%) =$315000

Actual Return =$337000

Residual Income   = ($337000-315000) = $22000

ROI = 9.63%

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