Question

ONLY NEED HELP FOR QUESTIONS 4-7

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 @ 40% Net income Total 998,000 598,800 399,200 319,200 80,000 32,000 48,000 Unit $ 49.90 29.94 19.96 15.96 4.00 1.60 $ 2.40 $ The company had average operating assets of $502,000 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 $100,000. (The released funds are used to pay off short-term creditors.) 3. The company achieves a cost savings of $11,000 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 $127,000. Interest on the bonds is $12,000 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 15%; operating assets remain unchanged. 6. At the beginning of the year, obsolete inventory carried on the books at a cost of $15,000 is scrapped and written off as a loss. 7. At the beginning of the year, the company uses $184,000 of cash (received on accounts receivable) to repurchase and retire some of its common stock.

Answer 1

Units 20000 Total Unit Sales 998000 49.90 Varaible Expenses 598800 29.94 Contribution Margin 399200 19.96 Fixed Expenses 15.96 319200 Net operating income 80000 4.00 Income Tax @ 40% 32000 1.6 Net income 48000 2.40 502000 Average operating Assets Companie's ROI 1 sales 998000 Net Operating income (NOI) 80000 502000 Operating Assets Margin= (NO1/ Sales) Turnover Sales / Operating Assets) ROI (NOI/ Operating Assets) 8.02% 1.99 15.94%

IF Firm Reduce the Average level of inventory BY 2 100000 Average Assets = 402000 sales 998000 Net Operating income (NOI) 80000 Operating Assets 402000 Effect 8.02% Un Changed Margin= (NO1/ Sales) Turnover Sales Operating Assets) ROI (NOI/ Operating Assets) 2.48 Increase 19.90% Increase 3) Cost Saving by 11000 sales 998000 Net Operating income (NOI) 91000 Operating Assets 502000 Effect 9.12% Increase 1.99 Unchange Margin= (NO1/ Sales) Turnover Sales Operating Assets) ROI (NO1/ Operating Assets) 18.13% Increase

4) IF the Firm issue a bond $127,000, Prodcution Cost will Reduce by 4000 Bond issue 127000 Cost saving 4000 sales 998000 Net Operating income (NOI) Operating Assets 84000 629000 Effect 8.42% Increase 1.59 Decrease 13.35% Decrease Margin= (NOI/Sales) Turnover=(Sales / Operating Assets) ROI (NOI/ Operating Assets) 5) Sales Increase by 15% 15% Sales 1147700 increase in contibtion Margin Fixed cost 459080 319200 Netoperating income Operating Assets 139880 502000 Effect 12.19% Increase 2.29 Increase 27.86% Increased Margin= (NOI/Sales) Turnover=(Sales / Operating Assets) ROI (NOI/ Operating Assets)

Obsolete inventory Carried on the at a cost of $15,000 6) Obsolete inventory 15000 sales 998000 Net Operating income (NOI) Operating Assets 65000 487000 Effect Margin- (NOI/ Sales) Turnover (Sales / Operating Assets) ROI =(NOI/ Operating Assets) 6.51% Decrease 2.05 Increase 13.35% Decreased Use Cash for Retire Common Stock 7) Retire Common Stock 184000 sales 998000 Net Operating income (NOI) 80000 Operating Assets 318000 Effect 8.02% Unchanged 3,14 Increase Margin= (NOI/ Sales) Turnover Sales Operating Assets) ROI (NOI/ Operating Assets) 25.16% Increase