Compute the company%u2019s return on investment (ROI) for the period using the R

Question

Compute the company%u2019s return on investment (ROI) for the period using the ROI formula stated in terms of margin and turnover. (Round your intermediate calculations and final answers to 2 decimal places.)

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 original ROI computed in (1) above.

The company achieves a cost savings of $8,000 per period by using less costly materials. (Round your intermediate calculations and final answers to 2 decimal places.)

Using Lean Production, the company is able to reduce the average level of inventory by $103,000. (The released funds are used to pay off bank loans.) (Round your intermediate calculations and final answers to 2 decimal places.)

Sales are increased by $199,200; operating assets remain unchanged. (Round your intermediate calculations and final answers to 2 decimal places.)

The company issues bonds and uses the proceeds to purchase $130,000 in machinery and equipment at the beginning of the period. Interest on the bonds is $11,000 per period. Sales remain unchanged. The new, more efficient equipment reduces production costs by $6,000 per period. (Round your intermediate calculations and final answers to 2 decimal places.)

The company invests $175,000 of cash (received on accounts receivable) in a plot of land that is to be held for possible future use as a plant site. (Round your intermediate calculations and final answers to 2 decimal places.)

Obsolete inventory carried on the books at a cost of $16,000 is scrapped and written off as a loss.(Round your intermediate calculations and final answers to 2 decimal places.)

The contribution format income statement for Westex, Inc., for its most recent period is given below:

Explanation / Answer

According to the given information,

Average operating assets = $500,000

The formula for calculating the ROI in terms of Margin and turnover is

ROI = Net operating income / Average operating assets

This can be written as

ROI = (Net Operating income / Sales) * (Sales / Average operating assets)

      = Margin * Turnover

Profit margin = Net Operating income / Sales

Asset turnover ratio = Sales / Average operating assets

First we will calculate the Profit margin ratio

Profit margin = Net Operating income / Sales

                    = $80,000 / $1,000,000

                    = 0.08 or 8%

Therefore, the profit margin is 8%

Now, we have to calculate the Asset turnover ratio.

Asset turnover ratio = Sales / Average operating assets

                               = $1,000,000 / $500,000

                               = 2 times

Substituting the values in the ROI formula, we get

ROI = Profit Margin * Asset Turnover

      = 0.08 * 2

      = 0.16 or 16%

Therefore, the Return on investment in terms of Margin and turnover is 16%

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