The contribution format income statement for Westex, Inc., for its most recent p

Question

The contribution format income statement for Westex, Inc., for its most recent period is given below: Unit $1,000,000 $50.00 600,000 30.00 Total Sales Variable expenses Contribution margin Fixed expenses 400,000 20.00 320,000 16.00 Net operating income Income taxes @ 40% 80,000 32,000 4.00 1.60 Net income $ 48,000 $ 2.40 The company had average operating assets of $491,000 during the period. Required: 1. Compute the company's return on investment (ROI) for the period using the ROl formula stated in terms of margin and turnover. (Round your intermediate calculations and final answers to 2 decimal places. Omit the "%"' sign in your response.) 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 ROI figure. Consider each question separately, starting in each case from the original ROl computed in (1) above.

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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