Chapter 10, Problem 5E

Calculating Return on Investment, Residual Income, Determining Effect of Changes in Sales, Expenses, Invested Assets, Hurdle Rate on Each

Solano Company has sales of $500,000, cost of goods sold of $370,000. other operating expenses of $50,000, average invested assets of $1,600,000, and a hurdle rate of 6 percent.

Required:
1. Determine Solano’s return on investment (ROI), investment turnover, profit margin, and residual income.
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.)
 a. Company sales and cost of goods sold increase by 30 percent.
 b. Operating expenses decrease by $10,000.
 c. Operating expenses increase by 20 percent.
 d. Average invested assets increase by $300,000.
 e. Solano changes its hurdle rate to 12 percent.