Question

This is the story of Goodies Gift Shop in its third year of operation in Small Town USA. Amelia Goodies, the owner, runs the shop with 4 full time employees, 2 part timers and herself. Her sales last year were $500,000 and her profit was $20,000 after taxes. If her balance sheet shows a net worth of $100,000 can you tell us what her return on investment was last year?
Balance Sheet (Year 2)
Current Assets
Cash10,000
Accounts Receivable15,000
Inventory 200,000
Property and Equipment100,000
Total Assets325,000
Liabilities
Accounts Payable80,000
Loan Balance145,000
Owner’s Equity100,000
Total Liabilities and Equity325,000

This year Amelia has projected sales of $600,000 with a margin of $250,000. She has budgeted the following overhead:

Owner Salary35,000
Employee Wages100,000
Rent10,000
Advertising4,200
Supplies1,000
Telephone1,000
Other utilities600
Insurance2,000
Payroll Taxes30,000
Maintenance3.700
Legal and other500
professional fees
Miscellaneous2,000
Interest on Loan10,000
Total Overhead Exp.200,000

If taxes are 20% of Net Income, what is the planned profit for the year?

Answer 1

Answer:

1. Her return on investment is 20%

2. $40,000

Explanation:

1. We have Return on Investment = Net income from the Investment / The invested amount.

The net income is clearly stated in the Question which is the after-tax profit at $20,000.

The invested amount of Amelia is the amount she invested in Goodies Gift Shop which is illustrated as net worth ( owner's equity) at $100,000 in the Balance Sheet (Year 2).

As we have Return on Investment =  20,000/100,000 = 20%

2. We have the projected pre-tax profit = Projected margin - total overhead = 250K - 200K = $50,000

   The after-tax profit = pre-tax profit x (1- tax rate) = 50K x (1-20%) = $40,000