For each of the following questions, indicate whether the margin and turnover wi
ID: 2493723 • Letter: F
Question
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.
Compute the company’s return on investment (ROI) for the period using the ROI formula stated in terms of margin and turnover.
Using Lean Production, the company is able to reduce the average level of inventory by $400,000. (The released funds are used to pay off short-term creditors.) (Round your answers to 2 decimal places.)
The company achieves a cost savings of $32,000 per year by using less costly materials.
he contribution format income statement for Huerra Company for last year is given below:Explanation / Answer
a.
Calculation of Return on Investment:
Net income (A)
$ 252,000
Sales (B)
$ 4,000,000
Margin (C) = A/B
6.30%
Sales (B)
$ 4,000,000
Average operating assets (D)
$ 2,000,000
Turnover (E) = B/D
2.00
ROI = C*E
12.60%
b.
Calculation of Return on Investment:
Net income (A)
$ 252,000
Sales (B)
$ 4,000,000
Margin (C) = A/B
6.30%
Sales (B)
$ 4,000,000
Average operating assets =2000000-400000 =(D)
$ 1,600,000
Turnover (E) = B/D
2.50
ROI = C*E
15.75%
b.
Calculation of Return on Investment:
Net income (A) = 252000 + 32000 =
$ 284,000
Sales (B)
$ 4,000,000
Margin (C) = A/B
7.10%
Sales (B)
$ 4,000,000
Average operating assets (D)
$ 2,000,000
Turnover (E) = B/D
2.00
ROI = C*E
14.20%
a.
Calculation of Return on Investment:
Net income (A)
$ 252,000
Sales (B)
$ 4,000,000
Margin (C) = A/B
6.30%
Sales (B)
$ 4,000,000
Average operating assets (D)
$ 2,000,000
Turnover (E) = B/D
2.00
ROI = C*E
12.60%
b.
Calculation of Return on Investment:
Net income (A)
$ 252,000
Sales (B)
$ 4,000,000
Margin (C) = A/B
6.30%
Sales (B)
$ 4,000,000
Average operating assets =2000000-400000 =(D)
$ 1,600,000
Turnover (E) = B/D
2.50
ROI = C*E
15.75%
b.
Calculation of Return on Investment:
Net income (A) = 252000 + 32000 =
$ 284,000
Sales (B)
$ 4,000,000
Margin (C) = A/B
7.10%
Sales (B)
$ 4,000,000
Average operating assets (D)
$ 2,000,000
Turnover (E) = B/D
2.00
ROI = C*E
14.20%
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