C O ezto.mheducation.com/hm.tpx?-0.3823411423426243 1530809771530 Problem 11-20
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C O ezto.mheducation.com/hm.tpx?-0.3823411423426243 1530809771530 Problem 11-20 Return on Investment (ROI) Analysis LO11-1 The contribution format income statement for Huerra Company for last year is given below Total Sales Variable expenses $1,002,000 $50.10 601,200 30.06 Contribution margin Fixed expenses 400,800 20.04 318,800 15.94 Net operating income Income taxes @ 40% 82,000 4.10 32,800 1.64 Net income $ 49,200 2.46 The company had average operating assets of $505,000 during the year Required 1. Compute the company's return on investment (ROI) 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.) Margin Turnover RO For each of the following questions, indicate whether the margin and turmover 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 of inventory by $92,000 (The Type here to searcExplanation / Answer
1. Calculation of Return on Investment.(ROI)
ROI = Margin * Turnover
Margin = Net Operating Income/Sales = $82,000/$1,002,000 = 0.081836 or 8.2%
Turnover = Sales/Average Operating Assets = $1,002,000/$505,000 = 1.984158
ROI = 8.2% * 1.98 = 16.27%
2. Decrease in average inventory level, will decrease Operating Assets by same amount.
Current Operating Assets = Operating Assets - Decrease in Inventory
Current Operating Assets = $505,000 - $92,000 = $413,000
Margin = Net Operating Income/Sales = $92,000/$1002,000 = 0.091816 = 9.2%
Turnover = Sales/Average Operating Assets = $1002,000/$413,000 = 2.42615
ROI = 9.2% * 2.42615 = 22.32058
3. Cost Savings will increase the net operating incocme.
Current Operating Income = Net Operating Income + Cost Savings = $92,000+$13,000 = $105,000
Margin = $105,000/1002,000 = 0.10479 or 10.48%
Turnover = Sales/Average Operatingg Assets = $1002,000/$505,000 = 1.984158
ROI = 10.48% * 1.98 = 20.79 %
4. Purchasing new equipment increase the operating assets
When Production Cost is reduced, it increases the net operating income.
Operating Assets = Operating Assets + Machinery and Equipment = $505,000 + $127,000 = $632,000
Net Operating Income = Net Operating Income + Decrease in production cost = $92,000+$6,000 = $98,000
Margin = $98,000/$1,002,000 = 0.097804 = 9.78%
Turnover = $1002000/$632,000 = 1.585443
ROI = 9.78% * 1.585 = 15.51%
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