Howe Company increased its ROI from 20% to 25%. Net operating income and sales r

Question

Howe Company increased its ROI from 20% to 25%. Net operating income and sales remained at their previous levels of $40,000 and $1,000,000 respectively. The increase in ROI was attributed to a reduction in operating assets brought about by the sale of obsolete inventory at cost (the proceeds from the sale were used to reduce bank loans). By how much was inventory reduced?

A) $8,000

B) $40,000

C) $10,000

D) it is impossible to determine from the data given.

A) $8,000

B) $40,000

C) $10,000

D) it is impossible to determine from the data given.

Explanation / Answer

ROI = Net income/ Operating Assets

Previous ROI = 20%

which means that

Previous Operating Assets = 40000/20% = 200000

New ROI = 25%

Which means that new operating assets = 40000/25% = 160000

Change in operating assets = 200000-160000 =40000

Therefore it means that inventory is reduced by $40000

Therefore answer will be B) $40000.

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