The contribution format income statement for Huerra Company for last year is giv

Question

The contribution format income statement for Huerra Company for last year is given below Total Sales Variable expenses $ 1.010,000 $50.50 806,000 30.30 Contribution margin Fixed expenses 404,000 20.20 324,000 16.20 Net operating income income taxes @ 40% 80.000 32,000 4.00 1.80 Net income S 48,000 S2.40 The company had average operating assets of $503,000 during the year, Required: 1. Compute the company's return on investment (ROl) for the period using the ROl formula stated in terms of margin and turnover. (Round your Turnover answer to 2 decimal places. Round your Margin and ROl percentage answers to 2 decimal places fie., 0.1234 should be entered as 12.34).) Margin Turnover 4.751% 2.01 2.38 9% 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 ROl figure. Consider each question separately, starting in each case from the data used to compute the original ROi in (1) above. 2. Using Lean Production, the company is able to reduce the average level of inventory by $100,000. (The released funds are used to pay off short-term creditors.) (Round your Turnover answer to 2 decimal places. Round your Margin and ROl percentage answers to 2 decimal places (ie., 0.1234 should be entered as 12.34).) Margin Turnover ROI

Explanation / Answer

Answer 1 ROI = Profit Margin % * Asset turnover ratio Profit Margin % = Net Income / Sales = $48000 / $1010000 = 4.75% Asset turnover ratio = Sales / Average operating assets = $1010000 / $503000 = 2.01 times ROI = Profit Margin % * Asset turnover ratio = 4.75% * 2.01 = 9.54% Answer 2 Average operating assets = $503000 - $100000 = $403000 Asset turnover ratio = Sales / Average operating assets = $1010000 / $403000 = 2.51 times ROI = Profit Margin % * Asset turnover ratio = 4.75% * 2.51 = 11.91% Effect Margin 4.75% No Turnover 2.51 Increase ROI 11.91% Increase Answer 3 Revised net Income = {Net Operating Income + Cost savings}* (1-tax rate) = ($80000 + $7000)*(1-0.40) = $52,200 Profit Margin % = Net Income / Sales = $52,200 / $1010000 = 5.17% ROI = Profit Margin % * Asset turnover ratio = 5.17% * 2.01 = 10.39% Effect Margin 5.17% Increase Turnover 2.01 No ROI 10.39% Increase Answer 4 Revised Net Income = Net Operating Income + Saving in production cost - Interest expense )*(1-tax rate) = [$80000+$6000-$15000]*(1-0.40) = $42,600 Profit Margin % = Net Income / Sales = $42,600 / $1010000 = 4.22% Revised average operating assets = $503000 + ($124000/2) = $565000 Asset turnover ratio = Sales / Average operating assets = $1010000 / $565000 = 1.79 times ROI = Profit Margin % * Asset turnover ratio = 4.22% * 1.79 = 7.54% Effect Margin 4.22% Decrease Turnover 1.79 Decrease ROI 7.54% Decrease

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