AT&T; 4G 6:30 PM ezto.mheducation.com 1 * 89% 4. The company issues bonds and us
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AT&T; 4G 6:30 PM ezto.mheducation.com 1 * 89% 4. The company issues bonds and uses the proceeds to purchase $500,000 in machinery and equipment at the beginning of the period. Interest on the bonds is $60,000 per year. Sales remain unchanged. The new, more efficient equipment reduces production costs by $20,000 per year. (Round your answers to 2 decimal places) 5. Sales are increased by 20%; operating assets remain unchanged. (Round your answers to 2 decimal places.) 6. Obsolete inventory carried on the books at a cost of $40,000 is scrapped and written off as a loss. (Round your answers to 2 decimal places.) 7. The company uses $200,000 of cash (received on accounts receivable) to repurchase and retire some of its common stock. (Round your answers to 2 decimal places.)Explanation / Answer
1) Margin = (Net operating income/Sales)*100 = (360,000/4,000,000)*100 = 9%
Turnover = Sales/Average Operating Assets = 4,000,000/2,000,000 = 2
ROI = Margin*Turnover = 9%*2 = 18%
2) Margin remain unchanged = 9%
New Turnover = Sales/Revised Average Operating Assets = 4,000,000/(2,000,000-400,000) = 2.5 (Increase)
New ROI = 9%*2.5 = 22.5% (increase)
3) Net operating Income will increase by $32,000 but sales and average operating assets remain unchanged.
New Margi = (360,000+32,000)/4,000,000 = 9.8% (Increased)
Turnover = 4,000,000/2,000,000 = 2 (remains unchanged)
New ROI = 9.8%*2 = 19.6% (Increased)
4) Net Opeating income will increased by 20,000(360,000+20,000), Average operating assets will increased by 500,000(2,000,000+500,000) and sales remain unchanged.
New Margin = 380,000/4,000,000 = 9.5%(Increase)
New Turnover = 4,000,000/2,500,000 = 1.6 (Decrease)
New ROI = 9.5%*1.6 = 15.2% (Decrease)
5) Sales are increased by 20%, therefore net operating income will be as follows:-
New Operating income = (Contribution*1.2)-Fixed expenses = (1,200,000*1.2)-840,000 = $600,000
Increased Sales = $4,000,000*1.20 = 4,800,000
New Margin = 600,000/4,800,000 = 12.5% (Increase)
New Turnover = 4,800,000/2,000,000 = 2.4 (Increase)
New ROI = 12.5%*2.4 = 30%(Increase)
6) Net Operating Income and Average Operating assets will decreased by $40,000
New Margin = (360,000-40,000)/4,000,000 = 8% (Decrease)
New Turnover = 4,000,000/(2,000,000-40,000) = 2.04 (Increase)
New ROI = 8%*2.04 = 16.32%(Decrease)
7) Average operating assets will decrease by $200,000
New Margin = 360,000/4,000,000 = 9% (Unchanged)
New Turnover = 4,000,000/(2,000,000-200,000) = 2.22 (Increase)
New ROI = 9%*2.22 = 19.98%(Increase)
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