Question

Problem 10-20 Return on Investment (ROI) Analysis (L010-1) 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 @ 4ex Net income Total Unit $1,004,000 $50.20 602,400 30.12 401,680 20.88 319,600 15.98 82,000 4.10 32,800 1.64 49,200 $ 2.46 The company had average operating assets of $499.000 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 $98,000. (The released funds are used to pay off short-term creditors.) 3. The company achieves a cost savings of $9.000 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 $128.000. Interest on the bonds is $16.000 per year. Sales remain unchanged. The new, more efficient equipment reduces production costs by $6.000 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 $16.000 is scrapped and written off as a loss. 7. At the beginning of the year, the company uses $183,000 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.

Answer 1

Sales Varaible Expenses Contribution Margin Fixed Expenses Net operating income Income Tax @ 40% Net income Total Unit 1004000 602400 401600 319600 82000 32800 49200 50.20 30.12 20.08 15.98 4.10 1.64 2.46 Average operating Assets 499000 Companie's ROI sales Net Operating income (NOI) Operating Assets 1004000 82000 499000 Margin= (NOI/ Sales) Turnover =( Sales / Operating Assets) ROI =( NOI/ Operating Assets) 8.17% 2.01 16.43%

IF Firm Reduce the Average level of inventory BY 98000 Average Assets = 401000 sales Net Operating income (NOI) Operating Assets 1004000 82000 401000 Margin= (NOI/ Sales) Turnover =( Sales / Operating Assets) ROI =( NOI/ Operating Assets) Effect 8.17% Un Changed 2.50 Increase 20.45% Increase Cost Saving by 9000 sales Net Operating income (NOI) Operating Assets 1004000 91000 499000 Margin= (NOI/ Sales) Turnover =( Sales / Operating Assets) ROI =( NOI/ Operating Assets) Effect 9.06% Increase 2.01 Unchnage 18.24% Increase

J4) IF the Firm issue a bond $128,000 Prodcution Cost will Reduce by 6000 Bond issue 128000 Cost saving 6000 sales Net Operating income (NOI) Operating Assets 1004000 88000 627000 Effect 8.76% Increase 1.60 Decrease 14.04% Decrease Margin= (NOI/Sales) Turnover =( Sales / Operating Assets) ROI =( NOI/ Operating Assets) 5) Sales Increase by 20% Sales increase in contibtion Margin Fixed cost Netoperating income Operating Assets 20% 1204800 481920 319600 162320 499000 Effect 13.47% Increase 2.41 Increase 32.53% Increase Margin= (NOI/ Sales) Turnover = Sales / Operating Assets) ROI =( NOI/Operating Assets)

Obsolete inventory Carried on the at a cost of $16000 6) Obsolete inventory 16000 sales Net Operating income (NOI) Operating Assets 1004000 66000 483000 Margin= (NOI/ Sales) Turnover =( Sales / Operating Assets) ROI =( NOI/ Operating Assets) Effect 6.57% Decrease 2.08Increase 13.66% Decreased Use Cash for Retire Common Stock 7) Retire Common Stock 183000 sales Net Operating income (NOI) Operating Assets 1004000 82000 316000 Margin= (NOI/ Sales Turnover = Sales / Operating Assets) ROI =( NOI/ Operating Assets Effect 8.17% Unchanged 3.18 Increase 25.95% Increase