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19 November, 10:21

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. Required If 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.)

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  1. 19 November, 10:45
    0
    a) 18.75%

    b) $ 149333.33

    Explanation:

    Given:

    Return on investment = 10% = 0.1

    Total sales = $ 300000

    Total operating assets = $ 320000

    Reduction in expenses = $ 28000

    a) The return on investment is calculated as:

    Return on investment = Net income / operating assets

    on substituting the values, we get

    0.1 = Net income / $ 320000

    or

    Net income = 0.1 * $ 320000

    or

    Net income = $ 32000

    The reduction in expenses is the amount that has been gained i. e the net income will increase

    thus, the net income = $ 32000 + $ 28000 = $ 60000

    now,

    the return on investment for the latest net income will be

    Return = $ 60000/$320,000

    or

    Return = 18.75%

    b) for the condition given in the second case

    we have

    Return = 18.75%

    Net income = $ 32000

    Return = Net income / operating asset

    or

    18.75% = $32000 / operating asset

    or

    Operating asset = $32000/0.1875

    or

    Operating assets = $ 170666.67

    Now, the decrease of the operating asset from the actual asset = $ 320000 - $ 170666.67 = $ 149333.33

    Thus, the operating cost must decrease by $ 149333.33
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