Question

Franklin Company calculated its return on investment as 10 percent. Sales are now $370,000, and the amount of total operating assets is $390,000.

Required

1. If expenses are reduced by $31,200 and sales remain unchanged, what return on investment will result? (Round your answer to 2 decimal places. (i.e., .2345 should be entered as 23.45).)

2. If both sales and expenses cannot be changed, what change in the amount of operating assets is required to achieve the same result? (Do not round intermediate calculations. Round your answer to the nearest whole dollar amount.)

a. Return on investment b. Operating assets must by

Answer 1

Answer -

a.	Return on investment	18%
b.	Operating assets must	decrease by	$173333

Calculation:

a. Answer -

As per given information,

ROI = 10%

Sales = $370000

Total operating assets = $390000

So,

ROI = Operating income / Operating assets

10% = Operating income / $390000

10% * $390000 = Operating income

Operating income = $39000

Now,

Operating income = Sales - Expenses

Expenses = Sales - Operating income

Expenses = $370000 - $39000

Expenses = $331000

If, expenses are reduced by $31200 then

Expenses = $331000 - $31200 = $299800

And

Operating income = Sales - Expenses

Operating income = $370000 - $299800

Operating income = $70200

Therefore,

ROI = Operating income / Operating assets

ROI = $70200 / $390000

ROI = 18%

b. Answer -

If both sales and expenses cannot change then

Operating income = Sales - Expenses

Operating income = $370000 - $331000

Operating income = $39000

To achieve the same result of increasing ROI from 10% to 18%, the amount of operating assets need to be decreased.

Therefore,

ROI = Operating income / Operating assets

18% = $39000 / Operating assets

Operating assets = $39000 / 18%

Operating assets = $216666.67

So,

Operating assets must decreased by $173333.33 ($390000 - $216666.67)