Question

The contribution format income statement for Huerra Company for last year is given below:

	Total		Unit
Sales	$	992,000	$	49.60
Variable expenses		595,200		29.76
Contribution margin		396,800		19.84
Fixed expenses		312,800		15.64
Net operating income		84,000		4.20
Income taxes @ 40%		33,600		1.68
Net income	$	50,400	$	2.52

The company had average operating assets of $492,000 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 ROI 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 $6,000 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 $126,000. Interest on the bonds is $14,000 per year. Sales remain unchanged. The new, more efficient equipment reduces production costs by $4,000 per year.

5. As a result of a more intense effort by sales people, sales are increased by 10%; operating assets remain unchanged.

6. At the beginning of the year, obsolete inventory carried on the books at a cost of $17,000 is scrapped and written off as a loss.

7. At the beginning of the year, the company uses $185,000 of cash (received on accounts receivable) to repurchase and retire some of its common stock.

(Round your intermediate calculations and final answers to 2 decimal places.)

1) Question #1:

Margin Turnover ROI

2) Question #2:

3) Question #3:

4) Question #4:

5) Question #5:

6) Question #6:

7) Question #7:

Answer 1

Sales Varaible Expenses Contribution Margin Fixed Expenses Net operating income Income Tax @ 40% Net income Total Unit 992000 595200 396800 312800 84000 33600 50400 49.60 29.76 19.84 15.64 4.20 1.68 2.52 Average operating Assets 492000 Companie's ROI sales Net Operating income (NOI) Operating Assets 992000 84000 492000 8.47% Margin= (NOI/ Sales Turnover =( Sales / Operating Assets) ROI =( NOI/ Operating Assets) 2.02 17.07%

IF Firm Reduce the Average level of inventory BY 95000 Average Assets = 397000 sales 992000 Net Operating income (NOI) 84000 Operating Assets 397000 Margin= (NOI/ Sales) Turnover =( Sales / Operating Assets) ROI =( NOI/ Operating Assets) Effect 8.47% Un Changed 2.50 Increase 21.16% Increase Cost Saving by 6000 sales Net Operating income (NOI) Operating Assets 992000 90000 492000 Margin= (NOI/ Sales) Turnover =( Sales / Operating Assets) ROI =( NOI/ Operating Assets) Effect 9.07% Increase 2.02 Unchange 18.29% Increase

4) If the Firm issue a bond $126,000, Prodcution Cost will Reduce by 4000 Bond issue 126000 Cost saving 4000 sales Net Operating income (NOI) Operating Assets 992000 88000 618000 Margin= (NOI/ Sales) Turnover =( Sales / Operating Assets) ROI = ( NOI/ Operating Assets) 5) Sales Increase by 10% Sales increase in contibtion Margin Fixed cost Netoperating income Operating Assets Effect 8.87% Increase 1.61 Decrease 14.24% Decrease 10% 1091200 436480 312800 123680 492000 Effect 11.33% Increase 2.22 Increase 25.14% Increase Margin= (NOI/ Sales Turnover =( Sales / Operating Assets) ROI =( NOI/ Operating Assets)

6) Obsole Obsolete inventory Carried on the at a cost of $17000 °) Obsolete inventory 17000 sales Net Operating income (NOI) Operating Assets 992000 67000 475000 Margin= (NOI/ Sales) Turnover =( Sales / Operating Assets) ROI =( NOI/ Operating Assets) Effect 6.75% Decrease 2.09 Increase 14.11% Decreased Use Cash for Retire Common Stock Retire Common Stock 185000 sales Net Operating income (NOI) Operating Assets 992000 84000 307000 Margin= (NOI/ Sales) Turnover =( Sales / Operating Assets) ROI =( NOI/Operating Assets) Effect 8.47% Unchanged 3.23 Increase 27.36% Increase