Goals for Sales and Return on Assets

The president of Farcry, Inc. and her department managers are reviewing the operating results of the year just completed. Sales increased by 12% from the previous year to $790,000. Average total assets for the year were $400,000. Net income, after adding back interest expense, net of tax, was $60,000.

The president is happy with the performance over the past year but is never satisfied with the status quo. She has set two specific goals for next year: (1) a 15% growth in sales and (2) a return on assets of 21%.

To achieve these goals, the president has stated her intention to increase the total asset base by 10% over the base for the year just completed.

Required:

1. For the year just completed, compute the following ratios. Round your answers to two decimal places.

a. Return on sales	%
b. Asset turnover	times
c. Return on assets	%

2. Compute the necessary asset turnover for next year to achieve the president's goal of a 15% increase in sales. Round your answer to two decimal places. times

3. Calculate the income needed next year to achieve the goal of a 21% return on total assets. (Note: Assume that income is defined as net income plus interest, net of tax.) $

4. Based on your answers to parts (2) and (3), comment on the reasonableness of the presidents goals. On what must the company focus to attain these goals? choose one of the following:

-Income will have to increase, sales should increase and costs have to be reduced.

-Income will have to increase, sales cannot be increased but costs have to be reduced.

-Income will have to decrease, sales should decrease and costs should increase.

-No changes required, as none of these factors can be controlled by the company.