The contribution format income statement for Huerra Company for last year is giv
ID: 2573386 • Letter: T
Question
The contribution format income statement for Huerra Company for last year is given below:
The company had average operating assets of $502,000 during the year.
Required:
1. Compute the company's 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 $92,000. (The released funds are used to pay off short-term creditors)
3. The company achieves a cost of savings of $7,000 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 $124,000. Interest on the bonds is $16,000 per year. Sales remain unchanged. The new, more efficent equipment erduces production costs by $7,000 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 $16,000 is scrapped and written off as a loss.
7. At the bedinning of the year, the company uses $175,000 of cash (received on accounts receivable) to repurchase and retire some of its common stock.
Total Unit Sales $1,006,000 $50.30 Variable Expenses 603,600 30.18 Contribution Margin 402,400 20.12 Fixed Expenses 318,400 15.92 Net Operating Income 84,000 4.20 Income Taxes @ 40% 33,600 1.68 Net Income 50,400 2.52Explanation / Answer
3. If there is an increase in the cost of savings in materials then margin and tyrnover will increase.
4. There is a decrease in the margin and turnover is bonds are issued.
5. There is and increase in the return on operating assets but the margin on the product is constant.
7. If Company purchases its common stock, then operating assets will be reduced to $327,000(502,000-175,000), then there be increase in return on operating assets but the margin on per unit is constant.
Return on Investment- Net Income/Operating Assets Return on Margin= Magin Per Unit/ Sales Per Unit =50400/502000 =2.52/50.30 10.04% 5.01%Related Questions
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