The contribution format income statement for Strickland, Inc., for its most rece

Question

The contribution format income statement for Strickland, Inc., for its most recent period is given below: Total Unit 1,146,000 s 57.30 Sales Variable expenses 687,600 34.38 Contribution margin Fixed expenses 458,400 357,000 22.92 17.85 Net operating income Income taxes @ 40% 101,400 40,560 5.07 2.03 Net income $ 60,840 3.04 The company had average operating assets of $568,000 during the period Required 1. Compute the company's return on investment (ROl) 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 (i.e., 0.1234 should be entered as 12.34).) 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 original ROl computed in (1) above

Explanation / Answer

Req 1: PRESENT Sales Revenue 1,146,000 Net operating income after tax 60,840 Operating Assets 568,000 Margin%(Net Operating Income/Sales*100) 5.31% Turnover(Sales/ Operating assets) 2.02 ROI(margin%*Turnover) 10.73% Req 2: Direct material decrease by $ 12,500 Contribution and net operating income before tax increase by $ 12,500 Net Operating income increase by (12500-tax rate i.e. 40%)   $ 7,500 Revised Operating income after tax (60840+7500) $ 68,340 Therefore, REVISED Sales Revenue 1,146,000 Net operating income after tax 68,340 Operating Assets 568,000 Margin%(Net Operating Income/Sales*100) 5.96% Turnover(Sales/ Operating assets) 2.02 ROI(margin%*Turnover) 12.04% Req 3: Average level of inventory reduced by $104,000 Operating assets revised to (568,000-104,000) $ 464,000 Therefore, REVISED Sales Revenue 1,146,000 Net operating income after tax 60,840 Operating Assets 464,000 Margin%(Net Operating Income/Sales*100) 5.31% Turnover(Sales/ Operating assets) 2.47 ROI(margin%*Turnover) 13.12% Req 4: Present selling price $ 57.30 per unit Contribution per unit $ 22.92 pe runit CM ratio (Contribution/ sales*100) ( 22.92/57.30 *100) = 40% Now, Sales increase by $ 263,000 Contribution increase by (263,000*40% ) = $ 105,200 Net Operating income after tax increase by (105,200 -40% ) = $ 63,120 Revised Sales (1146,000+263,000) = $1409,000 Revised Net operating income after tax( 60840+63120) = $ 123,960 Therefore, REVISED Sales Revenue 1,409,000 Net operating income after tax 123,960 Operating Assets 568,000 Margin%(Net Operating Income/Sales*100) 8.80% Turnover(Sales/ Operating assets) 2.48 ROI(margin%*Turnover) 21.82%

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