Question

The income statement for Huerra Company for last year is provided below:

 

	Total			Unit
Sales	$	12,600,000		$	252.00
Less: Variable expenses		10,080,000			201.60
Contribution margin		2,520,000			50.40
Less: Fixed expense		1,260,000			25.20
Net operating income		1,260,000			25.20
Less: Income taxes @ 30%		378,000			7.56
Net income	$	882,000		$	17.64

 

The company had average operating assets of $6,000,000 during the year.

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 $300,000. (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).)

  

b. The company achieves a savings of $13 per unit by using cheaper materials. (Round intermediate and final answer to 2 decimal places.)

 

c. The company issues bonds and uses the proceeds to purchase machinery and equipment, thus increasing the average assets by $600,000. Interest on the bonds is $60,000 per year. Sales remain unchanged. The new, more efficient equipment reduces fixed production costs by $30,000 per year. (Round intermediate and final answer to 2 decimal places.)

 

d. As a result of a more intense effort by the sales staff, sales are increased by 20%; operating assets remain unchanged. (Round intermediate and final answer to 2 decimal places.)

 

e. Obsolete items of inventory carried on the records at a cost of $110,000 are scrapped and sold for 20% of the book value. (Use full amount of scrap while calculating average operating assets. Round intermediate calculation to 2 decimal places. Enter your percentage answer rounded to 2 decima places (i.e., 0.1234 should be entered as 12.34).)

 

f. The company uses $600,000 in cash (received on accounts receivable) to repurchase and retire some of its common shares. The net effect of this transaction is a $600,000 change in average operating assets. (Use full amount of scrap while calculating average operating assets. 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).)

 

g. The company pays a cash dividend to its shareholders, which results in a $600,000 change in average operating assets. (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

The income statement for Huerra Company for last year is provided below:

 

	Total			Unit
Sales	$	24,000,000		$	240.00
Less: Variable expenses		16,800,000			168.00
Contribution margin		7,200,000			72.00
Less: Fixed expense		3,600,000			36.00
Net operating income		3,600,000			36.00
Less: Income taxes @ 30%		1,080,000			10.80
Net income	$	2,520,000		$	25.20

 

The company had average operating assets of $20,000,000 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).)

 

 

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).)

 

 

b. The company achieves a savings of $12 per unit by using cheaper materials. (Round intermediate and final answer to 2 decimal places.)

 

 

c. The company issues bonds and uses the proceeds to purchase machinery and equipment, thus increasing the average assets by $400,000. Interest on the bonds is $40,000 per year. Sales remain unchanged. The new, more efficient equipment reduces fixed production costs by $20,000 per year. (Round intermediate and final answer to 2 decimal places.)

 

 

d. As a result of a more intense effort by the sales staff, sales are increased by 10%; operating assets remain unchanged. (Round intermediate and final answer to 2 decimal places.)

 

 

e. Obsolete items of inventory carried on the records at a cost of $110,000 are scrapped and sold for 10% of the book value. (Use full amount of scrap while calculating average operating assets. 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).)

 

 

f. The company uses $300,000 in cash (received on accounts receivable) to repurchase and retire some of its common shares. The net effect of this transaction is a $300,000 change in average operating assets. (Use full amount of scrap while calculating average operating assets. 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).)

 

 

g. The company pays a cash dividend to its shareholders, which results in a $500,000 change in average operating assets. (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).)

 

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