The contribution format income statement for Huerra Company for last year is giv
ID: 2531408 • Letter: T
Question
The contribution format income statement for Huerra Company for last year is given below Total Uni Sales S 1,006,000 S 50.30 Variable expenses Contribution margin Fixed expenses Net operating income income taxes @ 40% Net income 402,400 324,400 78,000 20.12 18 22 3.90 S 46,800 $ 2.34 The company had average operating assets of $505,000 during the year. Required: 1. Compute the company's retun on investment (ROl) for the period using the ROl formula stated in terms of margin and tumover. (Round your intermediate calculations and final answer to 2 decimal places.) Margin Turnover ROI 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 ROl figure. Consider each question separately, starting in each case from the data used to compute the original ROl in (1) above. 2. Using Lean Production, the company is able to reduce the average level or inventory by $109,000. The released funds are used to pay om short-term creditors Round your answers to 2 decimal places. Effect Margin Turnover RCIExplanation / Answer
1.
Margin = Net operating income/sales x 100
= $ 78,000/$ 1,006,000 x 100 = 0.077534791 x 100 = 7.753479125 or 7.75 %
Turnover = Sales/Average operating assets
= $ 1,006,000/$ 505,000 = 1.992079208 or 1.99
ROI = Margin x Turnover ratio = 7.753479125 % x 1.992079208 = 15.44554455 or 15.45 %
Margin
7.75 %
Turnover
1.99
ROI
15.45 %
2.
Operating assets decrease by $ 109,000 due to reduce in inventory. Hence Turnover will increase.
Margin will not be affected.
Turnover = Sales/Average operating assets
= $ 1,006,000/ ($ 505,000 - $ 109,000) = $ 1,006,000/$ 396,000
= 2.54040404 or 2.54
ROI = Margin x Turnover ratio = 7.753479125 % x 2.54040404 = 19.6969697 or 19.70 %
Margin
7.75 %
Turnover
2.54
ROI
19.70 %
3.
Net operating income will increase by $ 15,000 due to cost savings. So margin will increase.
Turnover will not be affected.
Margin = Net operating income/sales x 100
= ($ 78,000 + $ 15,000)/$ 1,006,000 x 100
= $ 93,000/$ 1,006,000 x 100
= 0.092445328 x 100 = 9.2445328 or 9.24 %
ROI = Margin x Turnover ratio = 9.2445328 % x 1.992079208 = 18.41584158 or 18.42 %
Margin
9.24 %
Turnover
1.99
ROI
18.42 %
4.
Operating income will decrease by $ 19,000 (interest expense) and increase by $ 6,000 (cost saving)
Operating assets increases by $ 129,000 due to new machinery and equipments.
Margin and Turnover both will decrease.
Margin = Net operating income/sales x 100
= ($ 78,000 + $ 6,000 - $ 19,000) /$ 1,006,000 x 100
= $ 65,000/$ 1,006,000 x 100
= 0.064612 x 100 = 6.461233 % or 6.46 %
Turnover = Sales/Average operating assets
= $ 1,006,000/ ($ 505,000 + $ 129,000)
= $ 1,006,000/ $ 634,000
= 1.586750789 or 1.59
ROI = Margin x Turnover ratio = 6.461233 % x 1.586750789 = 10.25236593 % or 10.25 %
Margin
6.46 %
Turnover
1.59
ROI
10.25 %
****Answered first four questions.
Margin
7.75 %
Turnover
1.99
ROI
15.45 %
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