The contribution format income statement for Westex, Inc fo the most recent peri

Question

The contribution format income statement for Westex, Inc fo the most recent period is given below

The company had average operating assets of $500,000 during the period

Solve:

1. Compute the company's ROI for the period using the ROI formula in the terms of margin and turnover

( for each of the followin questions indicate whether the margin and turnover will increase, decrease or remain unchaged as a resulf to the events described , and then compute the new ROI figure. Consider each question separately, starting in each case from the orginal ROI computed in (1) above.

2. The company achieves a cost savings of $10,000 per period by using less costly materials.

3 Using Lean production the company is able to reduce the average level of inventory by $100,000. ( the released funds are used to pay off bank loans)

4. Sales are increased by $100,000 operating assets remain unchanged

5 the comapny issues bonds and usses the proceeds to purchase 125,000 in machinery and equipment at the beginning of the period. Interest on the bonds is $15,000 per period. Sales remain unchanged. The new more efficient equipment reduces production cost by $5,000 per period

6 the company invest 180,000 of cash (received on accounts receivable ) in a plot of land that is to be held for possible future use as a plant site

7 Obsolete inventory carried on the books at a cost of $20,00 is scrapped and written off as a lose

total unit sales 1,000,000 50.00 variable expenses 600,000 30.00 contribution margin 400,000 20.00 fixed expenses 320,000 16.00 net operating income 80,000 4.00 income taxes @ 40% 32,000 1.60 net income 48,000 2.40

Explanation / Answer

Ans 1 Current situation total unit sales 1,000,000 50 variable expenses 600,000 30 contribution margin 400,000 20 fixed expenses 320,000 16 net operating income 80,000 4 income taxes @ 40% 32,000 1.6 net income 48,000 2.4 Sales Margin = 4.80% Average Opearting Asset 500,000 Opearting Asset turnver ratio 2.00 ROI = Sales Margin%*Aset TO ratio 9.60% Situation 2 Variable expense less by $10,000 Current stuation total unit sales 1,000,000 50 variable expenses 590,000 30 contribution margin 410,000 20 fixed expenses 320,000 16 net operating income 90,000 4 income taxes @ 40% 36,000 1.6 net income 54,000 2.4 Sales Margin = 5.40% Average Opearting Asset 500,000 Opearting Asset turnver ratio 2.00 ROI = Sales Margin%*Aset TO ratio 10.80% Sales margin imroves due to low cost Turnover remain same as sales and operating asset remans same ROI improved Situation 3 Inventory saving $100,000 used to pay off bank loans Current stuation total unit sales 1,000,000 50 variable expenses 600,000 30 contribution margin 400,000 20 fixed expenses 320,000 16 net operating income 80,000 4 income taxes @ 40% 32,000 1.6 net income 48,000 2.4 Sales Margin = 4.80% Average Opearting Asset 400,000 Opearting Asset turnver ratio 2.50 ROI = Sales Margin%*Aset TO ratio 12.00% Sales margin imroves due to low cost as interset cost will come down Exact change in sales margincannot be calculated as reduction in interest cost cannot be calculated Asset TO ratio will improve as the Operating asset will reduce due to reduced inventory ROI improved Situation 4 Sales increase by $100000. Current stuation total unit sales 1,100,000 50 variable expenses 660,000 30 contribution margin 440,000 20 fixed expenses 320,000 16 net operating income 120,000 4 income taxes @ 40% 48,000 1.6 net income 72,000 2.4 Sales Margin = 6.55% Average Opearting Asset 500,000 Opearting Asset turnver ratio 2.20 ROI = Sales Margin%*Aset TO ratio 14.40% Sales margin improves due to higher contribution Asset TO ratio will improve as the sales value increases with same operating asset ROI improved Situation 5 Machinery purchase 125000, interest 15000, reduction in prod cost 5000 Current stuation total unit sales 1,000,000 50 variable expenses 595,000 30 contribution margin 405,000 20 fixed expenses 335,000 16 net operating income 70,000 4 income taxes @ 40% 28,000 1.6 net income 42,000 2.4 Sales Margin = 4.20% Average Opearting Asset 625,000 Opearting Asset turnver ratio 1.60 ROI = Sales Margin%*Aset TO ratio 6.72% Sales margin reduces due to overall cost increase over reduction Asset TO ratio will reduce as the Operating asset will increase due to machinery purchase ROI reduced Situation 6. No change in margin as revenue and cost not affected by investing cash from AR into non opearting land No change in Asset TO as land is non operating asset Situation 7 $20000 obsolete inventory w/off and charged as loss Current stuation total unit sales 1,000,000 50 variable expenses 620,000 30 contribution margin 380,000 20 fixed expenses 320,000 16 net operating income 60,000 4 income taxes @ 40% 24,000 1.6 net income 36,000 2.4 Sales Margin = 3.60% Average Opearting Asset 480,000 Opearting Asset turnver ratio 2.08 ROI = Sales Margin%*Aset TO ratio 7.50% Sales margin reduces as obsolete inventory w/off charged to cost Asset TO ratio will improve as the Operating asset will reduce due to reduced inventory ROI reduced

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