Question

Solano Company has sales of $760,000, cost of goods sold of $500,000, other operating expenses of $40,000, average invested assets of $2,250,000, and a hurdle rate of 11 percent. Required: 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 Investment Turnover Profit Margin Residual Income (Loss) 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)

Answer 1

1	Income Statement
		Solano Company
	Sales	$7,60,000
Less:	Cost of goods sold	$5,00,000
	Gross Profit	$2,60,000
Less:	Operating expenses	$40,000
	Income from operations	$2,20,000
	Average Invested Assets	$22,50,000
	Margin =Net operating income / Net Sales	28.95%
	Turnover =Net sales / Average Operating Assets	0.3
	ROI =Margin*Turnover	9.8%
	Residual income/(Loss) =Net operating income -(Average Invested assets*11%)	-$27,500
2
a	Income Statement
		Solano Company
	Sales($760,000*1.40)	$10,64,000
Less:	Cost of goods sold($500,000*1.40)	$7,00,000
	Gross Profit	$3,64,000
Less:	Operating expenses	$40,000
	Income from operations	$3,24,000
	Average Invested Assets	$22,50,000
	ROI =Net Income / Average Invested Assets	14.4%
	Residual income/(Loss) =Net operating income -(Average Invested assets*11%)	$76,500
b	Income Statement
		Solano Company
	Sales	$7,60,000
Less:	Cost of goods sold	$5,00,000
	Gross Profit	$2,60,000
Less:	Operating expenses($40,000-$11,000)	$29,000
	Income from operations	$2,31,000
	Average Invested Assets	$22,50,000
	ROI =Net Income / Average Invested Assets	10.3%
	Residual income/(Loss) =Net operating income -(Average Invested assets*11%)	-$16,500
c	Income Statement
		Solano Company
	Sales	$7,60,000
Less:	Cost of goods sold	$5,00,000
	Gross Profit	$2,60,000
Less:	Operating expenses($40,000*1.20)	$48,000
	Income from operations	$2,12,000
	Average Invested Assets	$22,50,000
	ROI =Net Income / Average Invested Assets	9.4%
	Residual income/(Loss) =Net operating income -(Average Invested assets*11%)	-$35,500
d	Income Statement
		Solano Company
	Sales	$7,60,000
Less:	Cost of goods sold	$5,00,000
	Gross Profit	$2,60,000
Less:	Operating expenses	$40,000
	Income from operations	$2,20,000
	Average Invested Assets($2,250,000+$430,000)	$26,80,000
	ROI =Net Income / Average Invested Assets	8.2%
	Residual income/(Loss) =Net operating income -(Average Invested assets*11%)	-$74,800
e	Income Statement
		Solano Company
	Sales	$7,60,000
Less:	Cost of goods sold	$5,00,000
	Gross Profit	$2,60,000
Less:	Operating expenses	$40,000
	Income from operations	$2,20,000
	Average Invested Assets	$22,50,000
	ROI =Net Income / Average Invested Assets	9.8%
	Residual income/(Loss) =Net operating income -(Average Invested assets*17%)	-$1,62,500