Question

Solano Company has sales of $780,000, cost of goods sold of $510,000, other operating expenses of $38,000, average invested assets of $2,300,000, and a hurdle rate of 12 percent.

c. Operating expenses increase by 10 percent. Return on Investment Residual Income (Loss) d. Average invested assets increase by $440,000. Return on Investment Residual Income (Loss) 196.800) e. Solano changes its hurdle rate to 18 percent. Return on Investment 10.09% Residual Income (Loss)

Answer 1

Particulars Sales Cost of Good Sold Gross Profit Operating Expense Income From Operations Calculation of Net Income Before increase in Operating Expense $7,80,000 $5,10,000 $2,70,000 $38,000 $2,32,000 After increase in Operating Expense $7,80,000 $5,10,000 $2,70,000 $41,800 $2,28,200 Ans c ROI = Income from Operation/Average invested assets Average Invested Assets $23,00,000 ROI ($228200/$2300000] 9.92% Residual Income = Income from Operation - (cost of capital x average invested Assets) Particulars Amount Income from Operation $2,28,200 Less: required income on invested assets @ 12% ($2,76,000) [$2300000 x 12%] Residual Income/(Loss) ($47,800)

Ans d ROI = Income from Operation/Average invested assets Average Invested Assets $27,40,000 ROI ($232000/$2740000] 8.47% Residual Income = Income from Operation - (cost of capital x average invested Assets) Particulars Amount Income from Operation $2,32,000 Less: required income on invested assets @ 12% ($3,28,800) [$2740000 x 12%] Residual Income/(Loss) ($96,800) Ans e ROI = Income from Operation/Average invested assets Average Invested Assets $23,00,000 ROI ($232000/$2300000] 10.09% Residual Income = Income from Operation - (cost of capital x average invested Assets) Particulars Amount Income from Operation $2,32,000 Less: required income on invested assets @ 18% ($4,14,000) [$2300000 x 18%] Residual Income/(Loss) ($1,82,000)