The contribution format income statement for Huerra Company for last year is giv

Question

The contribution format income statement for Huerra Company for last year is given below:

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 $107,000. (The released funds are used to pay off short-term creditors.)

3. The company achieves a cost savings of $14,000 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 $125,000. Interest on the bonds is $14,000 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 sales people, sales are increased by 10%; operating assets remain unchanged.

6. At the beginning of the year, obsolete inventory carried on the books at a cost of $18,000 is scrapped and written off as a loss.

7. At the beginning of the year, the company uses $176,000 of cash (received on accounts receivable) to repurchase and retire some of its common stock.

Total Unit Sales $ 992,000 $ 49.60 Variable expenses 595,200 29.76 Contribution margin 396,800 19.84 Fixed expenses 318,800 15.94 Net operating income 78,000 3.90 Income taxes @ 40% 31,200 1.56 Net income $ 46,800 $ 2.34

Explanation / Answer

As per policy, only four parts of a question is allowed to answer at a time, so answering 1 - 5 :

1) In terms of Margin Turnover ROI = net income/Operating assets turnover/Operating assets ROI = 46800/494000 992000/494000 ROI = 9.47% 200.01% 2) remains unchanged remains unchanged     (as consumption of inventory and investment) 3) increase remains unchanged ROI= (46800+14000) / 494000 12.31% 4) decrease decrease ROI= (46800-14000+6000) / (494000+125000) 992000/(494000+125000) ROI= 6.27% 160.26% 5) increase increase Net Profit = (992000*1.1*19.84/49.60 - 318800)*0.60 Net Profit = 70608 ROI= 70608/494000 (992000*1.1)/494000 ROI= 14.29% 220.89%

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