Question

Goals for Sales and Return on Assets The president of Blue Moon Corp. and her department managers are reviewing the operating results of the year just completed. Sales increased by 12% from the previous year to $750,000. Average total assets for the year were $400,000. Net income, after adding back interest expense, net of tax, was $60,000. The president is happy with the performance over the past year but is never satisfied with the status quo. She has set two specific goals for next year: (1) a 15% growth in sales and (2) a return on assets of 20% To achieve the second goal, the president has stated her intention to increase the total asset base by 10% over the base for the year just completed Required: 1. For the year just completed, compute the following ratios: For return on sales, round calculations to two decimal places, then, enter answer as a percentage. For example, 179 rounds to 18 and would be entered as 18, indicating 18% Round asset turnover to two decimal places For return on assets, round raw calculations to four decimal places; then, enter answer as a percentage rounded to two decimal places. For example, 17025 rounds to 1783 and would be entered as 17.83, indicating 17.83%. Return on sales b. Asset tumover 1.88 times c. Return on assets 15 2. Compute the necessary asset turnover for next year to achieve the president's goal of a 15% increase in sales. Round your answer to two decimal places X times 3. Calculate the income needed next year to achieve the goal of a 20% return on total assets. (Note: Assume that income is defined as net income plus interest, net of tax.)

Answer 1

2. Sales in current year = $750,000

Expected growth rate in sales = 15 %

Sales in the next year =  Sales in current year + Expected growth rate = $750,000 + ( 15% of $750,000) = $862,500

Average total assets in the current year = $400,000

Total asset base in next year = 10% over the current year

Average total assets in the next year = $400,000 + 10% of $400,000 = $440,000

Asset turnover ratio in the next year = Turnover in the next year / Average total assets in the next year = $862,500 / $440,000 = 1.96 times

3. Total assets in the next year = $440,000

Return on assets required = 20%.

Income required next year to achieve the above goal of return on assets = Total assets in the next year * Return on assets required = $440,000 * 20% = $88,000.