Question

The income statement for Huerra Company for last year is provided below. Total Unit Sales $15,200,000 $304.00 Less: Variable expenses 12,160,000 243.20 Contribution margin 3,040,000 60.80 Less: Fixed expense 1,520,000 30.40 Net operating income 1,520,000 30.40 Less: Income taxes @ 30% 456,000 9.12 Net income $ 1,064,000 $ 21.28 The company had average operating assets of $8,000,000 during the year. Required: 1. Compute the company's ROI for the period using the ROI formula stated in terms of margin and turnover. (Round intermediate calculation to 2 decimal places. Enter your percentage answer rounded to 2 decimal places (i.e., 0.1234 should be entered as 12.34).) ROI 19.00% 2. Consider each of the following questions separately and then compute the new ROI figure. Indicate whether the ROI will increase, decrease, or remain unchanged as a result of the events described. a. By using JIT, the company is able to reduce the average level of inventory by $500,000. (The released funds are used to pay off short-term creditors.) (Round intermediate calculation to 2 decimal places. Enter your percentage answer rounded to 2 decimal places (i.e., 0.1234 should be entered as 12.34).)

Answer 1

Requirement 1

The question has specifically asked us to find ROI using Margin and Turnover.

ROI = Sales margin x Investment turnover

Sales margin = Net income / Sales = $1,064,000 / $15,200,000 = 0.07

Investment turnover = Sales / Invested capital = $15,200,000 / $ 8,000,000 = 1.90

ROI = Sales margin x Investment turnover = 0.07 x 1.90 = 13.30%

Requirement 2a

Average inventory is part of operating assets and reduction it will reduce operating assets

New operating assets = $8,000,000 - $500,000 = $7,500,000

ROI = Net income / Operating assets = $1,064,000 / $7,500,000 = 14.19% (increase)

Requirement 2b

Savings will increase net income by $15.

New net income = $1,064,000 + ($15 x 50,000 units) = $1,814,000

ROI = Net income / Operating assets = $1,814,000 / $8,000,000 = 22.68% (increase)

Requirement 2c

New average assets = $8,000,000 + $500,000 = $8,500,000

New Net income = $1,064,000 - ($50,000 - $25,000) = $1,039,000

ROI = Net income / Operating assets = $1,039,000 / $8,500,000 = 12.22% (decrease)

Requirement 2d

New Contribution margin = 50,000 units x 110% x $60.80 = $3,344,000  

New Net income = ($3,344,000 - $1,520,000) x 70% = $1,276,800

ROI = Net income / Operating assets = $1,276,800 / $8,000,000 = 15.96% (increase)

Requirement 2e

New average assets = $8,000,000 - $110,000 = $7,890,000

New Net income = $1,064,000 + $27,500 = $1,091,500

ROI = Net income / Operating assets = $1,091,500 / $7,890,000 = 13.83% (increase)

Requirement 2f

New average assets = $8,000,000 - $500,000 = $7,500,000

ROI = Net income / Operating assets = $1,064,000 / $7,500,000 = 14.19% (increase)

Requirement 2g

New average assets = $8,000,000 - $4000,000 = $7,600,000

ROI = Net income / Operating assets = $1,064,000 / $7,600,000 = 14.00% (increase)