Question

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 @ 40% Net income Total 996,000 597,600 398, 400 320,400 78,000 31,200 46,800 Unit $ 49.80 29.88 19.92 16.02 3.90 1.56 $ 2.34 $ The company had average operating assets of $503,000 during the year.

Answer 1

Part 2 - Average Level of Inventory reduced by $100000

Effect - Only Average Operating assets reduced = ($503000 - $100000) = $403000

Particulars	Percentage	Effect
Margin ($78000/$996000)*100	7.83%	Unchanged
Turnover ($996000/$403000)	2.47	Increase
ROI ($78000/$403000)*100	19.35%	Increase

Part 3 - Cost savings achieved by $10000 per year

New net operating income will be = $88000

Particulars	Percentage	Effect
Margin ($88000/$996000)*100	8.84%	Increase
Turnover ($996000/$503000)	1.98	Unchanged
ROI ($88000/$503000)*100	17.50%	Increase

Part 4 -

New Net operating Income $84000

New Net operating assets = ($503000 + $130000) = $633000

This will effect Turnover, Margin and Roi

Particulars	Percent	Effect
Margin ($84000/$996000)*100	8.43%	Increase
Turnover ($996000/$633000)	1.57	Decrease
ROI ($84000/$633000)*100	13.27 %	Decrease

Part 5 - Sales are increased by 25%.

sales = 1,245,000

Net operating income = 1245000 - 747000 - 320400 = 177600

Effects

Particulars	Percent	Effect
Margin ($177600/$1245000)*100	14.26%	Increase
Turnover ($1245000/$503000)	2.48	Increase
RoI ($177600/$503000)*100	35.31%	Increase

Part 6 -

Net Operating Income = ($78000 - $19000) = $59000

Average Operating Assets= $484000

Particulars	Percentage	Effect
Margin ($59000/$996000)*100	5.92%	Decrease
Turnover ($996000/$484000)	2.06	Increase
RoI ($59000/$484000)*100	12.19%	Decrease

Part 7 -

Average operating assets will be ($503000 - $177000) = $326000

Particulars	Percentage	Effect
Margin ($78000/$996000)*100	7.83%	Unchanged
Turnover ($996000/$326000)	3.06	Increase
RoI ($78000/$326000)*100	23.93%	Increase