Question

Zachary Company calculated its return on investment as 10 percent. Sates are now $490,000, and the amount of total operating assets is $510,000. Required a. If expenses are reduced by $51,000 and sales remain unchanged, what return on investment will result? (Round your answer to 2 decimal places. (i.e., 0.2345 should be entered os 23.45).) b. 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 colculotions. Round your final answer to the nearest whole dollor.)

Answer 1

To calculate the new return on investment (ROI) after reducing expenses, we need to determine the new net operating income (NOI) and the new average total operating assets.

Given:

Original ROI = 10%

Sales = $490,000

Total operating assets = $510,000

Expense reduction = $51,000

First, calculate the original NOI:

NOI = Sales - Expenses

NOI = $490,000 - Expenses

Since the original ROI is 10%, we can express the original NOI as a percentage of the original total operating assets:

10% = (NOI / Total operating assets) * 100

Now, let's calculate the new NOI:

New NOI = Sales - (Expenses - Expense reduction)

New NOI = $490,000 - ($510,000 - $51,000)

New NOI = $490,000 - $459,000

New NOI = $31,000

Next, calculate the new ROI:

New ROI = (New NOI / Total operating assets) * 100

New ROI = ($31,000 / $510,000) * 100

New ROI ≈ 6.08%

Therefore, the new ROI, after reducing expenses, would be approximately 6.08%.