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 36% 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 9.37% ROA. What will investment in Inventory have to be in order to achieve this goal?

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Dryomys Dryomys · Answer 1 · 2019-10-16T07:04:45+02:00

Answer:

$220,373.54 will investment in Inventory in order to achieve this goal.(ROA 9.37%)

Explanation:

Net income = 5% of sales

= 0.05 × $1,312,500

= $65,625

Return on assets (ROA) = 8.75%

as per the question we need ROA at 9.37%

[tex]ROA=\frac{Net\ income}{Total\ assets}[/tex]

[tex]0.0937=\frac{65,625}{New\ Total\ assets}[/tex]

[tex]New\ Total\ assets=\frac{65,625}{0.0937}[/tex]

New total assets = $700,373.533

To obtain ROA of 9.37% the Miserly manufacturing Company's CPO has to Reduce its Total assets by $ 49,626.46

[$ 750,000 - $700,373.533 = $ 49,626.46]

for that CPO has to reduce inventory by $ 49,626.46

Initial Inventory = 36% of Total Assets

Inventory = 36% × $750,000

= $270,000

New order of Inventory is equal to $220,373.54 {$270,000 - $49,626.46}

$220,373.54 will investment in Inventory in order to achieve this goal.(ROA 9.37%)