Question

The Miserly Manufacturing Company's CPO has been tasked with reducing inventory in order to facilitate achieving its CFO's Return on Assets (ROA) objective for the next fiscal year. Inventory investments currently represent 37% of Total Assets. The most recent balance sheet indicates that Total Assets are $750,000. Last fiscal year, Miserly achieved a 5% Profit Margin on $1,312,500 in Annual Sales. ROA was 8.75%. This year the CFO wishes to achieve a 9.89% ROA. What will investment in Inventory have to be in order to achieve this goal?

Answer 1

$191,049.039 will investment in Inventory in order to achieve this goal.(ROA 9.89%)

Step-by-step explanation:

Net income = 5% of sales

Net Income = 5% × ($1,312,500)

= $65,625

Return on Assets (ROA) = (Net Income ÷ Total Assets) × 100

ROA = ($65,625 ÷ $750,000) × 100

= 8.75%

as per the question we need ROA at 9.89%

ROA = Net income ÷ Total Assets

9.89% = $ 65,625 ÷ new total assets

New Total Assets = $ 65,625 ÷ 9.89%

New Total Assets = $663,549.039

To obtain ROA of 9.89% the Miserly manufacturing Company's CPO has to Reduce its Total assets by $86,450.961

[$ 750,000 - $663,549.039 = $86,450.961]

for that CPO has to reduce inventory by $86,450.961

Initial Inventory = 37% of Total Assets

Inventory = 37% × $750,000

= $277,500

New order of Inventory is equal to $191,049.039 {$277,500 - $86,450.961}

$191,049.039 will investment in Inventory in order to achieve this goal.(ROA 9.89%)