Question

My question is for #6
However you have to solve #1 to analyze #6

The obsolete inventory worth 40000 is scrapped, causing AOA to decrease and NOI to decrease. However sales is not effected, why is this?

PROBLEM 10-20 Return on Investment (ROI) Analysis LO 10-1 The contribution format income statement for Huerra Company for last year is given below: Sales Variable expenses Contribution margin............... Fixed expenses. Net operating income .... .. Income taxes a 30%.......... Net income Total $4,000,000 2,800,000 1,200,000 840,000 360,000 108,000 $ 252,000 Unit $80.00 56.00 24.00 16.80 7.20 2.16 $ 5.04 The company had average operating assets of $2,000,000 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 com figure. Consider each question separately, starting in each case from the data used to compute the original ROI in (1) above. Using Lean Production, the company is able to reduce the average level of inventory by $400,000 (The released funds are used to pay off short-term creditors.) TL ahlawan n asuinne af 20.000 mer year by using less costly materials.

#6
why is there no effect on sales?

Extra Info:

Answer 1

Inventory is an asset which when sold increases sales account balance as well as profit.

Look, inventory until sold is considered as inventory but if inventory is not sold than it is not going effect sales account.It becomes a part of sales when it is actually sold.

Inventory obsolesce represents an expense (like cost of goods sold). As this inventory is not sold in scrap here and rather set off as loss.

inventory of $40,000 is transferred to loss. It will reduce Asset value and ROI only.

Sales will not get affected by this. Sales would have been effected if inventory would have been sold at lower price or in case of sales return. This invent