Eastevan Company calculated its return on investment as 10 percent. Sales are now $300,000, and the amount of total operating assets is $320,000. RequiredIf expenses are reduced by $28,000 and sales remain unchanged, what return on investment will result? (Round your answer to 2 decimal places. (i.e., .2345 should be entered as 23.45).)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 final answer to the nearest whole dollar.)
Question
Eastevan Company calculated its return on investment as 10 percent. Sales are now 320,000. RequiredIf expenses are reduced by $28,000 and sales remain unchanged, what return on investment will result? (Round your answer to 2 decimal places. (i.e., .2345 should be entered as 23.45).)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 final answer to the nearest whole dollar.)
Solution
To solve this problem, we need to understand the formula for Return on Investment (ROI). The formula is:
ROI = (Net Profit / Cost of Investment) * 100%
- If expenses are reduced by $28,000 and sales remain unchanged, what return on investment will result?
First, we need to calculate the current net profit. Since we know the ROI is 10% and the cost of investment (total operating assets) is $320,000, we can rearrange the formula to find the net profit:
Net Profit = (ROI * Cost of Investment) / 100% Net Profit = (10% * 32,000
Now, if expenses are reduced by 32,000 + 60,000.
We can now calculate the new ROI:
ROI = (Net Profit / Cost of Investment) * 100% ROI = (320,000) * 100% = 18.75%
- If both sales and expenses cannot be changed, what change in the amount of operating assets is required to achieve the same result?
We want the ROI to be 18.75% with the same net profit of $32,000. We can rearrange the formula to find the new cost of investment (total operating assets):
Cost of Investment = Net Profit / (ROI / 100%) Cost of Investment = 170,667 (rounded to the nearest whole dollar)
So, the amount of total operating assets needs to be reduced by 170,667 = $149,333 to achieve the same ROI of 18.75%.
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