Question

The contribution format income statement for Huerra Company for last year is given below: $ Sales Variable expenses Contribution margin Pixed expenses Net operating income Income taxes 401 Net incone Total 992.000 595,200 396,800 314,800 32,600 32.800 49,200 Unit $49.60 29.76 19.84 15.74 4.10 1.64 $ 2.46 $ The company had average operating assets of $494,000 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 $6,000 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 $122.000. Interest on the bonds is $19,000 per year. Sales remain unchanged. The now, more efficient equipment reduces production costs by $5,000 per year. 5. As a result of a more intense effort by sales people, sales are increased by 15% operating assets remain unchanged. 6. At the beginning of the year, obsolete inventory carried on the books at a cost of $17,000 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 Answer is not complete Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 Required 4 Required 5 Compute the company's return on investment (ROI) for the period using the ROI formula stated in terms of margin and turnover. (Round your intermediate calculations and final answer to 2 decimal places

Answer 1

1) Margin= Net operating income/Sales

= $82000*100/992000= 8.27%

Turnover= Sales/Average operating assets

= $992000/494000= 2 times

ROI= Margin*Turnover

= 8.27%*2= $16.54%

2) If the company reduces the average level of inventory by $104000, the average operating assets of the company will also reduced by $104000. So, the new average operating assets

= $494000-104000= $390000

Margin= Net operating income/Sales

= $82000*100/992000= 8.27%

Turnover= Sales/Average operating assets

= $992000/390000= 2.54 times

ROI= Margin*Turnover

= 8.27%*2.54= 21%

Margin	8.27	%	Unchanged
Turnover	2.54		Increase
ROI	21	%	Increase

3) If the company achieves a cost saving of $6000 per year, the net operating income of the company will also increases by $6000

New net operating income= $82000+6000= $88000

Margin= Net operating income/Sales

= $88000*100/992000= 8.87%

Turnover= Sales/Average operating assets

= $$992000/494000= 2 times

ROI= Margin*Turnover

= 8.87%*2= 17.74%

Margin	8.87	%	Increase
Turnover	2		Unchanged
ROI	17.74	%	Increase

4) If the company issue bonds and uses the proceeds to purchase the machinery and equipment for $122000, the average operating assets of the company will increases by $122000. And as the production costs will reduces by $5000 per year the net operating income will increases by $5000 per year. So, the new average operating assets and net operating income will be

New average operating assets= $494000+122000= $616000

New net operating income= $82000+5000= $87000

Margin= Net operating income/Sales

= $87000*100/992000= 8.77%

Turnover= Sales/Average operating assets

= $992000/616000= 1.61 times

ROI= Margin*Turnover

= 8.77%*1.61= $14.12%

Margin	8.77	%	Increase
Turnover	1.61		Decrease
ROI	14.12	%	Decrease

5)

Sales (992000*1.15)	$1140800
Variable expenses	684480
Contribution margin	456320
Fixed expenses	314800
Net operating income	$141520

Variable expenses= $(595200/992000)*1140800= $684480

Margin= Net operating income/Sales

= $141520*100/1140800= 12.41%

Turnover= Sales/Average operating assets

= $1140800/494000= 2.31 times

ROI= Margin*Turnover

= 12.41%*2.31= 28.67%

Margin	12.41	%	Increase
Turnover	2.31		Increase
ROI	28.67	%	Increase

6) If the obsolete inventory $17000 is scrapped the net operating income and average operating assets will also reduce by $17000

New net operating income= $82000-17000= $65000

New average operating assets= $494000-17000= $477000

Margin= Net operating income/Sales

= $65000*100/992000= 6.55%

Turnover= Sales/Average operating assets

= $992000/477000= 2.08 times

ROI= Margin*Turnover

= 6.55%*2.08= 13.62%

Margin	6.55	%	Decrease
Turnover	2.08		Increase
ROI	13.62	%	Decrease

7) If the company uses cash $183000 to repurchase and retire its common stock, the average operating assets will decrease by $183000

New average operating assets= $494000-183000= $311000

Margin= Net operating income/Sales

= $82000*100/992000= 8.27%

Turnover= Sales/Average operating assets

= $992000/311000= 3.19 times

ROI= Margin*Turnover

= 8.27%*3.19= 26.38%

Margin	8.27	%	Unchanged
Turnover	3.19		Increase
ROI	26.38	%	Increase