Question

3. The following data pertain to Napal Company for 20x1 Sales revenue Cost of goods sold Operating expenses Average invested capital $1,000,000 550,000 400,000 500,000 Required: A. Calcul B. If the sal expenses have to be reduced in 20x2 to achieve a 15% return on investment? ate the company's sales margin, capital turnover, and return on investment for 20x1. es and average invested capital remain the same, to what level would total costs and C. Assume that costs and expenses are reduced, as calculated in requirement "B." Calculate the firm's new sales margin. D. Suggest two possible actions that will improve the company's capital turnover. 4. Consider the following data of Twisted Corporation's Northern Division: Sales revenue $18,750,000 Capital turnover Average invested capital Sales margin Income Return on investment Residual income Twisted's imputed interest rate 4% 15% 12% Required A. Calculate Northern's capital turnover B. Calculate Northern's average invested capital. C. Calculate Northern's income. D. Calculate residual income.

Answer 1

QUES 3 : NAPAL COMPANY

Ques 1
Sales		1000000
Less:
COGS	550000
Operating expenses	400000	950000
Operating income		50000
Sales margin: $50,000 / $1,000,000 = 5%
Capital turnover: $1,000,000 /$500,000 = 2
Return on investment: $50,000 / $500,000 = 10%
B. New income level: $500,000 ´ 15% = $75,000
Sales	1000000
Less:income	75000
costs and expenses	925000
so the present costs need to reduced by
25000 to achieve 15% level of profit
C.
Sales margin: $75,000 ¸ $1,000,000 = 7.5%
D.
Any ratio is improved by changing either the
numerator or denominator
so sales revenue increase or
reduce the investment amount to improve
capital turnover

QUES 4 TWISTED

A. Capital turnover:
ROI = Sales margin * capital turnover
Capital turnover = ROI * sales margin
Capital turnover = 15% * 4%
Capital turnover = 3.75
B. Average invested capital:
Capital turnover = Sales revenue / average invested capital
Average invested capital = Sales revenue / capital turnover
Average invested capital = $18,750,000 / 3.75
Average invested capital = $5,000,000
C. Income:
Return on investment = Income / average invested capital
Income = Return on investment * average invested capital
Income = 15% * $5,000,000
Income = $750,000
D. Residual income:
Residual income = Income - imputed interest charge
Residual income = $750,000 - ($5,000,000 * 12%)
Residual income = $150,000