Question

Perez Company calculated its return on investment as 10 percent. Sales are now $410,000, and the amount of total operating assets is $430,000. Required a. If expenses are reduced by $38,700 and sales remain unchanged, what return on investment will result? (Round your answer to 2 decimal places. (i.e., 0.2345 should be entered as 23.45).) b. If both sales and expenses cannot be changed, what change in the amount of operating assets is required to achieve the same result? (Do not round intermediate calculations. Round your answer to the nearest whole dollar amount.) a. Return on investment z b. Operating assets must

Answer 1

Requirement a

Operating Income /Operating assets = ROI

Operating Income /430,000 = 10%

Operating income = 430,000*10% = $43,000

Operating Income = Sales -Expenses

43,000 = 410,000 -Expenses

Expenses = 410,000-43,000

Expenses = $367,000

If expenses are reduced by $38,700, operating income will become $81,700 ($43,000 +38,700)

Return on Investment = $81,700/430,000 = 19.00%

Requirement b

If both sales and expenses cannot be changed , the operating income would remain at $ 43,000. To reach the same result of increasing ROI from 10% to 19%, the investment base needs to be decreased.

Operating Income /Operating assets = ROI

$43,000/Operating assets = 19%

Operating Assets = $43,000/19%

Operating Assets = $226,316

The operating assets must be decreased from $430,000 to $226,316 which requires a decrease of $203,684