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
