Kaler Company has sales of $1,410,000, cost of goods sold of $785,000, other ope
ID: 2619339 • Letter: K
Question
Kaler Company has sales of $1,410,000, cost of goods sold of $785,000, other operating expenses of $198,000, average invested assets of $4,400,000, and a hurdle rate of 11 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.)
Please calculate step-by-step
2. Several possible changes that Kaler could face in the upcoming year follow. Determine each scenario’s impact on Kaler’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 5 percent.
b. Operating expenses increase by $83,000.
c. Operating expenses decrease by 10 percent.
d. Average invested assets decrease by $385,000.
e. Kaler changes its hurdle rate to 8 percent.
Explanation / Answer
Solution:
Given that Sales = $1,410,000, Cost of goods sold = $785,000, Other operating expenses = $198,000, Average invested assets = $4,400,000 and Hurdle rate = 11%
1. Net Income = Sales - Cost of goods sold - Other operating expenses
Net Income = $1,410,000 - $785,000 - $198,000
Net Income = $427,000
ROI = Net Income/Average invested assets
ROI = $427,000/$4,400,000
ROI = 9.70%
Investment turnover = Sales/ Average invested assets
Investment turnover = $1,410,000/ $4,400,000
Investment turnover = 32.05%
Profit margin = Net Income/Sales
Profit margin = $427,000/$1,410,000
Profit margin = 30.28%
Residual income = Net Income - Charge for Capital used
Residual income = $427,000 - 4,400,000 x 0.11
Residual income = -$57,000
2.
a. Company sales and cost of goods sold increase by 5 percent.
Sales = $1,410,000 x 1.05 = $1,480,500
Cost of goods sold = $785,000 x 1.05 = $824,250
Net Income = Sales - Cost of goods sold - Other operating expenses
Net Income = $1,480,500 - $824,250 - $198,000
Net Income = $458,250
ROI = Net Income/Average invested assets
ROI = $458,250/$4,400,000
ROI = 10.41%
Residual income = Net Income - Charge for Capital used
Residual income = $458,250 - 4,400,000 x 0.11
Residual income = -$25,750
b. Operating expenses increase by $83,000.
Operating expenses = $198,000 + $83,000 = $281,000
Net Income = Sales - Cost of goods sold - Other operating expenses
Net Income = $1,410,000 - $785,000 - $281,000
Net Income = $344,000
ROI = Net Income/Average invested assets
ROI = $344,000/$4,400,000
ROI = 7.82%
Residual income = Net Income - Charge for Capital used
Residual income = $344,000 - 4,400,000 x 0.11
Residual income = -$140,000
c. Operating expenses decrease by 10 percent.
Operating expense = 198,000 x (1 - 0.10) = 178,200
Net Income = Sales - Cost of goods sold - Other operating expenses
Net Income = $1,410,000 - $785,000 - $178,200
Net Income = $446,800
ROI = Net Income/Average invested assets
ROI = $446,800/$4,400,000
ROI = 10.15%
Residual income = Net Income - Charge for Capital used
Residual income = $446,800 - 4,400,000 x 0.11
Residual income = -$37,200
d. Average invested assets decrease by $385,000
Average invested assets = $4,400,000 - $385,000 = $4,015,000
Net Income = Sales - Cost of goods sold - Other operating expenses
Net Income = $1,410,000 - $785,000 - $198,000
Net Income = $427,000
ROI = Net Income/Average invested assets
ROI = $427,000/$4,015,000
ROI = 10.64%
Residual income = Net Income - Charge for Capital used
Residual income = $427,000 - 4,015,000 x 0.11
Residual income = -$14,650
e. Kaler changes its hurdle rate to 8 percent.
Net Income = Sales - Cost of goods sold - Other operating expenses
Net Income = $1,410,000 - $785,000 - $198,000
Net Income = $427,000
ROI = Net Income/Average invested assets
ROI = $427,000/$4,400,000
ROI = 9.70%
Residual income = Net Income - Charge for Capital used
Residual income = $427,000 - 4,400,000 x 0.08
Residual income = $75,000
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