Kaler Company has sales of $1,470,000, cost of goods sold of $800,000, other ope

Question

Kaler Company has sales of $1,470,000, cost of goods sold of $800,000, other operating expenses of $213,000, average invested assets of $4,700,000, and a hurdle rate of 12 percent. Required: 1. Determine Kaler's return on investment (ROI), investment turnover, profit margin, and residual income. (Do not round your intermediate calculations. Enter your ROI and Profit Margin answer to the nearest whole percentage, (i.e., 0.1234 should be entered as 12%). Round your Investment Turnover answers to 4 decimal places.) Return on Investment Investment Turnover Profit Margin Residual Income (Loss) 2. Several possible changes that Kaler could face in the upcoming year follow. Determine each scenario's impact on Kaler's ROl and residual income. (Note: Treat each scenario independently) (Enter your ROl 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 5 percent Return on Investment Residual Income (Loss) b. Operating expenses increase by $86,000. Return on Investment Residual Income (Loss)

Explanation / Answer

Sales a $1,470,000 Less:Cost of goods sold b $800,000 Gross Profit $670,000 Less: Operating Expenses c $             213,000 Net Profit d $457,000 Average invested asset e $4,700,000 hurdle rate f 12% Required income (e*f) g $564,000 1 1) Return on Investment (ROI)   (d/e) 9.72% 2) Investment turnover (times)     (a/e) 0.312765957 3) Profit margin (d/a) 31.09% 4) Residual income (d-g) ($107,000) 2 a. Company sales and cost of goods sold increased by 5 percent.       Particulars Amount sales (1470000*105%) a $1,543,500 cost of goods sold (800000*105%) b $840,000 other operating expenses c $             213,000 Net income    (a+b+c) d $490,500 average invested assets e $4,700,000 hurdle rate f 12% Required income (e*f) g $564,000 return on investment (ROI)   (d/e) 0.104361702 Residual income (d-g) ($73,500) b. Operating expenses increased by $86,000 Particulars Amount Sales a $1,470,000 Less:Cost of goods sold b $800,000 Gross Profit $670,000 Less: Operating Expenses ($213000+$86000) c $             299,000 Net Profit d $371,000 Average invested asset e $4,700,000 hurdle rate f 12% Required income (e*f) g $564,000 return on investment (ROI)   (d/e) 7.89% Residual income (d-g) ($193,000) c. Operating expenses decrease by 20 percent. Particulars Amount Sales a $1,470,000 Less:Cost of goods sold b $800,000 Gross Profit $670,000 Less: Operating Expenses ($213000*80%) c $             170,400 Net Profit d $499,600 Average invested asset e $4,700,000 hurdle rate f 12% Required income (e*f) g $564,000 return on investment (ROI)   (d/e) 10.63% Residual income (d-g) ($64,400) d. Average invested assets increase by $415000. Particulars Amount Sales a $1,470,000 Less:Cost of goods sold b $800,000 Gross Profit $670,000 Less: Operating Expenses c $             213,000 Net Profit d $457,000 Average invested asset (4700000-415000) e $4,285,000 hurdle rate f 12% Required income (e*f) g $514,200 return on investment (ROI)   (d/e) 10.67% Residual income (d-g) ($57,200) e. Kaler changes its hurdle rate to 9 percent. Particulars Amount Sales a $1,470,000 Less:Cost of goods sold b $800,000 Gross Profit $670,000 Less: Operating Expenses c $             213,000 Net Profit d $457,000 Average invested asset e $4,700,000 hurdle rate f 9% Required income (e*f) g $423,000 return on investment (ROI)   (d/e) 9.72% Residual income (d-g) $34,000

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