Question

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.)

Answer 1

Answer:

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