Question

Kaler Company has sales of $1,610,000, cost of goods sold of $835,000, other operating expenses of $248,000, average invested assets of $5,400,000, and a hurdle rate of 11 percent. Required: 1. Determine Kaler's return on investment (RON, investment turnover, profit margin, and residual income. 2. Several possible changes that Kaler could face in the upcoming vear follow. Determine each scenario's impact on Kalers Roland residual income. (Note: Treat each scenario independently.) a. Company sales and cost of goods sold increase by 5 percent. b. Operating expenses increase by $93.000. c. Operating expenses decrease by 20 percent. d. Average invested assets decrease by $485.000 e. Kaler changes its hurdle rate to 8 percent. Complete this question by entering your answers in the tabs below. Reg 1 Reg 2A Reg 28 Reg 2C Reg 2D Reg 2E 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 answers to 2 decimal places (.e., 0.1234 should be entered as 12.34%). Round your Investment Turnover answer to 4 decimal places.) Return on investment Investment Turnover Profit Margin Residual income (Loss)

Answer 1

1	ROI=Net profit/Average invested assets
	Net profit:
					$
	Sales				1610000
	Less: Cost of goods sold				835000
	Gross profit				775000
	Less: Operating expenses				248000
	Net profit				527000
	ROI=527000/5400000=0.09759=9.76%
	Investment turnover=Sales/Average invested assets=1610000/5400000=0.2981
	Profit margin=Net profit/Sales=527000/1610000=0.3273=32.73%
	Residual income=Net profit-(Average invested assets*Hurdle rate)=527000-(5400000*11%)=527000-594000=-$67000
2
a.	ROI=Net profit/Average invested assets
	Net profit:
					$
	Sales		(1610000*1.05)		1690500
	Less: Cost of goods sold		(835000*1.05)		876750
	Gross profit				813750
	Less: Operating expenses				248000
	Net profit				565750
	ROI=565750/5400000=0.10477=10.48%
	Residual income=Net profit-(Average invested assets*Hurdle rate)=565750-(5400000*11%)=565750-594000=-$28250
b.	ROI=Net profit/Average invested assets
	Net profit:
					$
	Sales				1610000
	Less: Cost of goods sold				835000
	Gross profit				775000
	Less: Operating expenses		(248000+93000)		341000
	Net profit				434000
	ROI=434000/5400000=0.08037=8.04%
	Residual income=Net profit-(Average invested assets*Hurdle rate)=434000-(5400000*11%)=434000-594000=-$160000
c.	ROI=Net profit/Average invested assets
	Net profit:
					$
	Sales				1610000
	Less: Cost of goods sold				835000
	Gross profit				775000
	Less: Operating expenses		(248000*80%)		198400
	Net profit				576600
	ROI=576600/5400000=0.10677=10.68%
	Residual income=Net profit-(Average invested assets*Hurdle rate)=576600-(5400000*11%)=576600-594000=-$17400
d.	ROI=Net profit/Average invested assets
	Average invested assets=5400000-485000=$ 4915000
	ROI=527000/4915000=0.1072=10.72%
	Residual income=Net profit-(Average invested assets*Hurdle rate)=527000-(4915000*11%)=527000-540650=-$13650
e.	ROI won't change
	Residual income=Net profit-(Average invested assets*Hurdle rate)=527000-(5400000*8%)=527000-432000=$95000