Question

The contribution format income statement for Huerra Company for last year is given below: Unit Sales Variable expenses Contribution margin Fixed expenses Net operating income Income taxes @ 40% Net income Total $ 1,004,000 602,400 401,600 321,600 80,000 32,000 $ 48,000 $ 50.20 30.12 20.08 16.08 4.00 1.60 $ 2.40 The company had average operating assets of $508,000 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 $104,000. (The released funds are used to pay off short-term creditors.) 3. The company achieves a cost savings of $13,000 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 $18,000 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 $18,000 is scrapped and written off as a loss. 7. At the beginning of the year, the company uses $179,000 of cash (received on accounts receivable) to repurchase and retire some of its common stock. Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 Required 4 Required 5 Required 6 Required 7 As a result of a more intense effort by salespeople, sales are increased by 20%; operating assets remain unchanged. (Round your intermediate calculations and final answers to 2 decimal places.) Effect % Margin Turnover ROI % < Required 4 Required 6 >

Only need question 5,6,7 please.

Answer 1

Units 20000 Total Unit Sales 1004000 50.20 Varaible Expenses 602400 30.12 Contribution Margin 401600 20.08 Fixed Expenses 321600 16.08 Net operating income 80000 4.00 Income Tax @ 40% 32000 1.60 Net income 48000 2.40 Average operating Assets 508000 All Answers are Highlited with Yellow Color Companie's ROI sales Net Operating income (NOI) Operating Assets = 2 Margin= (NOI/ Sales) 80000 1004000 = Turnover =( Sales / Operating Assets) 1004000 508000 = ROI = ( NOI/ Operating Assets) 80000/ 508000 = IF Firm Reduce the Average level of inventory BY Average Assets 508000 - 104000 = sales Net Operating income (NOI) Operating Assets 1004000 80000 508000 Answer 7.97% 1.98 15.75% 104000 404000 1004000 80000 404000 Answer Effect 7.97% Un Changed 2.49 Increase 19.80% Increase = = Margin= (NOI/ Sales) 80000 / 1004000/= Turnover =( Sales / Operating Assets) 1004000/ 404000/= ROI =( NOI/ Operating Assets) 80000 / 404000/=

3) Cost Saving by 13000 sales 1004000 Net Operating income (NOI) 80000 + 13000 = 93000 Operating Assets 508000 Answer Effect Margin= (NOI/ Sales) 93000 / 1004000/= 9.26% Increase Turnover = (Sales / Operating Assets) 1004000/ 508000/= 1.98 Unchange ROI = ( NOI/ Operating Assets) 93000/ 508000/= 18.31% Increase 4) If the Firm issue a bond 127000 Prodcut cost redcuce by 5000 Bond issue 127000 Cost saving 5000 sales 1004000 Net Operating income (NOI) 80000 + 5000 = 85000 Operating Assets 508000 + 127000 = 635000 Answer Effect Margin= (NOI/ Sales) 85000 1004000 = 8.47% Increase Turnover = ( Sales / Operating Assets) 1004000 / 635000 = 1.58 Decrease ROI =( NOI/ Operating Assets) 85000/ 635000= 13.39% Decrease

20% 1004000 * 401600 120% 120% 5) Sales Increase by the Percentage of Sales increase in contibtion Margin Fixed cost Netoperating income (NOI) Operating Assets 1204800 481920 321600 160320 508000 Answer Effect 13.31% Increase 2.37 Increase 31.56% Increase Margin= (NOI/ Sales) 160320 Turnover =( Sales / Operating Assets) 1204800 / ROI = ( NOI/Operating Assets) 160320 1204800/= 508000/= 508000 = 18000 16) Obsolete inventory Carried on the at a cost of sales Net Operating income (NOI) 80000 - Operating Assets 18000 1004000 62000 490000 Answer Effect 6.18% Decrease 2.05 Increase 12.65% Decreased Margin= (NOI/ Sales) 62000/1004000/= Turnover =( Sales / Operating Assets) 1004000 490000/= ROI = ( NOI/ Operating Assets) 62000 / 490000/= 1,79,000 7) Use Cash for Retire Common Stock sales Net Operating income (NOI) Operating Assets = 508000 - 1,79,000 = 1004000 80000 329000 Effect 7.97% Unchanged 3.05 Increase 24.32% Increase Margin= (NOI/ Sales) 80000 / 1004000 = Turnover = ( Sales / Operating Assets) 1004000 / 329000 = ROI =( NOI/Operating Assets) 80000 329000/=