Question

Return to Sales Variable expenses Contribution margin Fixed expenses Net operating income Income taxes @ 40% Net income $ 1,008,000 604,800 403,200 323,200 80,000 32,000 $ 48,000 $ 50.40 30.24 20.16 16.16 4.00 1.60 $ 2.40 The company had average operating assets of $509,000 during the year. Required: 1. Compute the company's return on investment (ROI) for the period using the ROI formula stated in terms of margin and turnover. For each of the following questions, indicate whether the margin and turnover will increase, decrease, or remain unchanged as a result of the events described, and then compute the new ROI figure. Consider each question separately, starting in each case from the data used to compute the original Rol in (1) above. 2. Using Lean Production, the company is able to reduce the average level of inventory by $95,000. (The released funds are used to pay off short-term creditors.) 3. The company achieves a cost savings of $7,000 per year by using less costly materials. 4. The company issues bonds and uses the proceeds to purchase machinery and equipment that increases average operating assets by $130,000. Interest on the bonds is $19,000 per year. Sales remain unchanged. The new, more efficient equipment reduces production costs by $6,000 per year. 5. As a result of a more intense effort by salespeople, sales are increased by 15%; operating assets remain unchanged. 6. At the beginning of the year, obsolete inventory carried on the books at a cost of $18,000 is scrapped and written off as a loss. 7. At the beginning of the year, the company uses $182,000 of cash (received on accounts receivable) to repurchase and retire some of its common stock

Answer 1

Part 1: working sales 1E+06 net operating income b 80000 operating asset 509000 Margin=Net operating Income/Sales d=b/a 7.94% Turnover=sales operating assets le=a/c 1.98 ROI=Margin x turnover f=de 15.72% c Part 2: working sales net operating income operating asset =509000-95000 Margin=Net operating Income/Sales d=b/a Turnover=sales/operating assets e a/c ROI=Margin x turnover f=d*e effect 1E+06 80000 414000 7.94% unchanged 2.43 increase 19.32% increase Part 3: working effect sales 1E+06 net operating income (80000+7000) |ь 87000 operating asset c 509000 Margin=Net operating Income/Sales d=b/a 8.63% increase Turnover=sales/operating assets le=a/ c 1.98 unchanged ROI=Margin x turnover f=d*e 17.09% increase

Part 4: working sales h net operating income (80000+6000) operating asset (509000+130000) Margin=Net operating Income/Sales Turnover=sales/operating assets ROI=Margin x turnover effect 1008000 86000 639000 8.53% increase 1.58 decrease 13.46% decrease d=b/a e=a/c f=d*e Part 5: working sales (1008000* 1.15) net operating income =403200*1.15-323200 lb operating asset Margin=Net operating Income/Sales d=b/a Turnover=sales/operating assets e=a/c ROI=Margin x turnover f=d*e effect 1159200 140480| 509000 12.12% increase 2.28 increase 27.60% increase working Part 6: Sales net operating income (80000-18000) operating asset (509000-18000) Margin=Net operating Income/Sales Turnover=sales/operating assets ROI=Margin x turnover effect 1008000 62000 491000 6.15% decrease 2.05 increase 12.63% decrease d=b/a e=a/c f=d*e working Part 7: sales net operating income operating asset (509000-182000) Margin=Net operating Income/Sales Turnover=sales/operating assets ROI=Margin x turnover effect 1008000 80000 327000 7.94% unchanged 3.08 increase 24.46% increase d=b/a e=a/c f=d*e