Question

E10-5 Calculating Return on Investment, Residual Income, Determining Effect of Changes in Sales, Expenses, Invested Assets, Hurdle Rate on Each [LO 10-4, 10-5]

Solano Company has sales of $520,000, cost of goods sold of $380,000, other operating expenses of $51,000, average invested assets of $1,650,000, and a hurdle rate of 8 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.)

     

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.      

         
       
    b. Operating expenses decrease by $10,500.        
      
                

   c. Operating expenses increase by 20 percent.

                

    d. Average invested assets increase by $310,000.

                

    e. Solano changes its hurdle rate to 14 percent.

        

Answer 1

	Sales	520000
	Cost of Goods Sold	380000
	Operating Expenses	51000
	Net Operating Income	89000
	Operating assets	1650000
	Hurdle Rate	8%
1	ROI
	Margin/Turnover		5.39%
	Margin	Net Operating Profit/Sales*100	17.12%
	Turnover	Sales/Average operating Assets	0.3152
	Residual Income		-43000
2-a	Sales and Cost of Goods Sold increased by 40%
	Sales	728000
	Cost of Goods Sold	532000
	Operating Expenses	51000
	Net Operating Income	145000
	Hurdle Rate	8%
	Average Invested Assets	1650000
	ROI	8.79%
	Residual Income	13000
b	Operating Expenses decreased by 10500
	Sales	520000
	Cost of Goods Sold	380000
	Operating Expenses	40500
	Net Operating Income	99500
	Hurdle Rate	8%
	Average Invested Assets	1650000
	ROI	6.03%
	Residual Income	-32500
c	Operating Expenses increased by 20%
	Sales	520000
	Cost of Goods Sold	380000
	Operating Expenses	61200
	Net Operating Income	78800
	Hurdle Rate	8%
	Average Invested Assets	1650000
	ROI	4.78%
	Residual Income	-53200
d	Average Assets Increased by 310000
	Sales	520000
	Cost of Goods Sold	380000
	Operating Expenses	51000
	Net Operating Income	89000
	Hurdle Rate	8%
	Average Invested Assets	1960000
	ROI	4.54%
	Residual Income	-67800
e	Changes Hurdle Rate to 14%
	Sales	520000
	Cost of Goods Sold	380000
	Operating Expenses	51000
	Net Operating Income	89000
	Hurdle Rate	14%
	Average Invested Assets	1650000
	ROI	5.39%
	Residual Income	-142000