Question

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

Total Unit

Sales $1,004,000   $50.20

Variable expenses 602,400 30.12

Contribution margin 401,600 20.08

Fixed expenses 317,600 15.88

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 $498,000 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 $93,000. (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 $127,000. Interest on the bonds is $19,000 per year. Sales remain unchanged. The new, more efficient equipment reduces production costs by $5,000 per year.

5. As a result of a more intense effort by salespeople, sales are increased by 20%; operating assets remain unchanged.

6. At the beginning of the year, obsolete inventory carried on the books at a cost of $19,000 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.

I need Margin, Turover and ROI for all 7 and effect for each on all 7 (Decrease, Increase, Unchanged)

Answer 1

working Part 1: sales net operating income opera ting asset Margin Net operating Income/Sales d-b/a Turnover-sales/operating assets |ROI=Margin xturnover 1004000 a 84000 498000 C 8.37% e-a/c f-d*e 2.02 16.87% Part 2: sales net operating income |operating asset =498000-93000 Margin=Net operating Income/Sales d-b/a Turnover=sales/operating assets ROI=Margin xturnover working effect 1004000 a 84000 405000 C 8.37% unchanged 2.48increase 20.74% increa se e a/c f-d*e effect Part 3: sales net operating income (84000+60000) opera ting asset Margin Net operating Income/Sales |d=b/a Turnover=sales/operating assets ROI Margin xturnover working 1004000 a b 90000 498000 C 8.96% increa se 2.02 unchanged 18.07% increa se e-a/c f=d*e

working effect 1004000 Part 4: sales net operating income (84000+5000) |operating asset (498000+127000) Margin Net operating Income/Sales Turnover=sales/operating assets ROI=Margin x turnover a b 89000 625000 C d-b/a e-a/c f-d*e 8.86% increase 1.61 decrease 14.24% decrease effect Part 5: sales (1004000* 1.20) net operating income =401600*1.2-317600 opera ting asset Margin Net operating Income/Sales Turnover-sales/operating assets ROI=Margin x turnover working 1204800 b 164320 498000 C d-b/a e-a/c f=d*e 13.64% increase 2.42 increase 33.00% increase Part 6: |Sales net operating income (84000-19000) |operating asset (498000-19000) Margin=Net operating Income/Sales |Turnover-sales/operating assets ROI Margin x turnover effect working 1004000 b 65000 479000 C d-b/a e-a/c f-d*e 6.47% decrease 2.10 increase 13.57% decrease working effect Part 7: sales net operating income operating asset (498000-184000) Margin Net operating Income/Sales Turnover-sales/operating assets ROI Margin x turnover 1004000 84000 314000 C 8.37% unchanged d-b/a e a/c f=d*e 3.20 increase 26.75% increase