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acct9-8b - b If both sales and expenses cannot be changed...

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ACCT 245 Bronstein Exercise 9-8B Operating income ÷ Operating assets = ROI Operating income ÷ \$2,500,000 = 10% Operating income = Operating assets x ROI Operating income = \$2,500,000 x 10% = \$250,000 Operating income = Sales – Expenses = \$5,000,000 – Expenses=\$250,000 Expenses = \$5,000,000 – \$250,000 = \$4,750,000 a. If expenses are reduced by \$50,000, they would become \$4,700,000. Accordingly, the net income will become \$300,000 (i.e . , \$5,000,000 – \$4,700,000). ROI = \$300,000 ÷ \$2,500,000 = 12%
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Unformatted text preview: b. If both sales and expenses cannot be changed, the net income would remain at \$300,000. To reach the same result of increasing ROI from 10 % to 12%, the investment base needs to be decreased. Operating income Operating assets = ROI \$250,000 Operating assets = 12% Investment = \$250,000 12% = \$2,083,333 (rounded) The operating assets must be decreased from \$2,500,000 to \$2,083,333 to achieve 12% ROI. In other words, the investment base must be decreased by \$416,667....
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