Question

Solano Company has sales of $720,000, cost of goods sold of $480,000, other operating expenses of $45,000, average invested assets of $2,150,000, and a hurdle rate of 10 percent.

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.)

	Return on Investment 9.01 % Investment Turnover 0.3349 Profit Margin 27.01 % Residual Income (Loss) $(20,000)

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.  

	Return on Investment % Residual Income (Loss)

b. Operating expenses decrease by $9,000.        
  

	Return on Investment % Residual Income (Loss)

   c. Operating expenses increase by 20 percent.

	Return on Investment % Residual Income (Loss) d. Average invested assets increase by $410,000. Return on Investment % Residual Income (Loss) e. Solano changes its hurdle rate to 16 percent. Return on Investment % Residual Income (Loss)

Answer 1

• All working forms part of the answer
• Requirement 1

A	Sales	$      720,000.00
B	Cost of Goods Sold	$      480,000.00
C = A - B	Gross Profits	$      240,000.00
D	Operating expense	$         45,000.00
E = C - D	Net operating income	$      195,000.00
F	Average Assets invested	$   2,150,000.00
G = (E/F) x 100	Return on Investment	9.07%
H = (A/F) x 100	Investment Turnover	0.3349
I = (E/A) x 100	Profit Margin	27.08%
J	Hurdle rate	10%
K = F x J	Expected operating income	$      215,000.00
L = E - K	Residual Income	$      (20,000.00)

----Requirement 2

• Part A

A	Sales	$     1,008,000.00
B	Cost of Goods Sold	$        672,000.00
C = A - B	Gross Profits	$        336,000.00
D	Operating expense	$           45,000.00
E = C - D	Net operating income	$        291,000.00
F	Average Assets invested	$     2,150,000.00
G = (E/F) x 100	Return on Investment	13.53%
H = (A/F) x 100	Investment Turnover	0.4688
I = (E/A) x 100	Profit Margin	28.87%
J	Hurdle rate	10%
K = F x J	Expected operating income	$        215,000.00
L = E - K	Residual Income	$           76,000.00

• Part B

A	Sales	$      720,000.00
B	Cost of Goods Sold	$      480,000.00
C = A - B	Gross Profits	$      240,000.00
D	Operating expense	$        36,000.00
E = C - D	Net operating income	$      204,000.00
F	Average Assets invested	$ 2,150,000.00
G = (E/F) x 100	Return on Investment	9.49%
H = (A/F) x 100	Investment Turnover	0.3349
I = (E/A) x 100	Profit Margin	28.33%
J	Hurdle rate	10%
K = F x J	Expected operating income	$      215,000.00
L = E - K	Residual Income	$      (11,000.00)

• Part C

A	Sales	$            720,000.00
B	Cost of Goods Sold	$            480,000.00
C = A - B	Gross Profits	$            240,000.00
D	Operating expense	$              54,000.00
E = C - D	Net operating income	$            186,000.00
F	Average Assets invested	$        2,150,000.00
G = (E/F) x 100	Return on Investment	8.65%
H = (A/F) x 100	Investment Turnover	0.3349
I = (E/A) x 100	Profit Margin	25.83%
J	Hurdle rate	10%
K = F x J	Expected operating income	$            215,000.00
L = E - K	Residual Income	$            (29,000.00)

• Part D

A	Sales	$      720,000.00
B	Cost of Goods Sold	$      480,000.00
C = A - B	Gross Profits	$      240,000.00
D	Operating expense	$        45,000.00
E = C - D	Net operating income	$      195,000.00
F	Average Assets invested	$ 2,560,000.00
G = (E/F) x 100	Return on Investment	7.62%
H = (A/F) x 100	Investment Turnover	0.2813
I = (E/A) x 100	Profit Margin	27.08%
J	Hurdle rate	10%
K = F x J	Expected operating income	$      256,000.00
L = E - K	Residual Income	$      (61,000.00)

• Part E

A	Sales	$        720,000.00
B	Cost of Goods Sold	$        480,000.00
C = A - B	Gross Profits	$        240,000.00
D	Operating expense	$          45,000.00
E = C - D	Net operating income	$        195,000.00
F	Average Assets invested	$    2,150,000.00
G = (E/F) x 100	Return on Investment	9.07%
H = (A/F) x 100	Investment Turnover	0.3349
I = (E/A) x 100	Profit Margin	27.08%
J	Hurdle rate	16%
K = F x J	Expected operating income	$        344,000.00
L = E - K	Residual Income	$      (149,000.00)