The income statement for Huerra Company for last year is provided below: Total S

Question

The income statement for Huerra Company for last year is provided below: Total Sales Less: Variable expenses $12,000,000 $240.00 6,000,000 120.00 6,000,000 120.00 Contribution margin Less: Fixed expense 3,000,000 3,000,000 900,000 60.00 60.00 18.00 Net operating income Less: Income taxes @ 30% Net income $2,100,000 42.00 The company had average operating assets of $10,000,000 during the year Required: 1. Compute the company's ROl for the period using the ROl formula stated in terms of margin and turnover. (Round intermediate calculation to 2 decimal places. Enter your percentage answer rounded to 2 decimal places (i.e., 0.1234 should be entered as 12.34).) ROI 2. Consider each of the following questions separately and then compute the new ROI figure. Indicate whether the ROl will increase, decrease, or remain unchanged as a result of the events described a. By using JIT, the company is able to reduce the average level of inventory by $500,000. (The released funds are used to pay off short-term creditors.) (Round intermediate calculation to 2 decimal places. Enter your percentage answer rounded to 2 decimal places (i.e., 0.1234 should be entered as 12.34).) ROI

Explanation / Answer

2) a) Sales $12,000,000.00 Net operating income $3,000,000.00 Average Operating assets ($10,000,000 - $500,000) $9,500,000.00 Margin % = NOI/Sales 25.00% Asset Turnover = sales/operating assets 1.26 ROI = Margin% x Asset Turnover 31.58% Increased b) Sales $12,000,000.00 Net operating income($3,000,000+($12 x 50,000 units) $3,600,000.00 Average Operating assets $10,000,000.00 Margin % = NOI/Sales 30.00% Asset Turnover = sales/operating assets 1.20 ROI = Margin% x Asset Turnover 36.00% Increased c) Interest is a financing expense and thus it is not used to compute net operating income. Sales $12,000,000.00 Net operating income($3,000,000+20000) $3,020,000.00 Average Operating assets ($10,000,000 + $400,000) $10,400,000.00 Margin % = NOI/Sales 25.17% Asset Turnover = sales/operating assets 1.15 ROI = Margin% x Asset Turnover 29.04% decreased d) Sales $14,400,000.00 100.00% Variable expenses $7,200,000.00 50.00% Contribution margin $7,200,000.00 50.00% Fixed expenses $3,000,000.00 Net operating income $4,200,000.00 Average Operating assets $10,000,000.00 Margin % = NOI/Sales 29.17% Asset Turnover = sales/operating assets 1.44 ROI = Margin% x Asset Turnover 42.00% Increased e) Sales $12,000,000.00 Net operating income ($3,000,000 - (20% x 200000) $2,960,000.00 Average Operating assets $9,960,000.00 Margin % = NOI/Sales 24.67% Asset Turnover = sales/operating assets 1.20 ROI = Margin% x Asset Turnover 29.72% decreased f) Sales $12,000,000.00 Net operating income $3,000,000.00 Average Operating assets ($10,000,000 - 200000) $9,800,000.00 Margin % = NOI/Sales 25.00% Asset Turnover = sales/operating assets 1.22 ROI = Margin% x Asset Turnover 30.61% Increased g) Sales $12,000,000.00 Net operating income $3,000,000.00 Average Operating assets ($10,000,000 - 200000) $9,800,000.00 Margin % = NOI/Sales 25.00% Asset Turnover = sales/operating assets 1.22 ROI = Margin% x Asset Turnover 30.61% Increased

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