Chapter 11 G Save 6 Problem 11-20 Return on Investment (ROI) Analysis [LO11-1] 1

Question

Chapter 11 G Save 6 Problem 11-20 Return on Investment (ROI) Analysis [LO11-1] 10 points The contribution format income statement for Huerra Company for last year is given below: Total Unit Sales Variable expenses Contribution margin Fixed expenses Net operating income Income taxes 40% $1,008,000 $50.40 604,800 30.24 403,200 20.16 321,200 16.06 82,000 4.10 32,800 1.64 $ 49,200 $ 2.46 eBook Print Reference Net income The company had average operating assets of $507000 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 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 ROl in (1) above 2. Using Lean Production, the company is able to reduce the average level of inventory by $93,000. (The released funds are used to pay off short-term creditors.) 3. The company achieves a cost savings of $13,000 per year by using less costly materials. 4. The company issues bonds and uses the proceeds to purchase machinery and equipment that increases average operating assets by $124,000. Interest on the bonds is $20,000 per year. Sales remain unchanged. The new, more efficient equipment reduces production costs by $3,000 per year. 5. As a result of a more intense effort by sales people, sales are increased by 15%; operating assets remain unchanged 6. At the beginning of the year, obsolete inventory carried on the books at a cost of $19,000 is scrapped and written off as a loss 7. At the beginning of the year, the company uses $185,000 of cash (received on accounts receivable) to repurchase and retire some of its common stock. Complete this question by entering your answers in the tabs below. Required Required Required Required Required Required Required 1 2 4 6 7 The company issues bonds and uses the proceeds to purchase machinery and equipment that increases average operating assets by $124,000. Interest on the bonds is $20,000 per year. Sales remain unchanged. The new, more efficient equipment reduces production costs by $3,000 per year. (Round your answers to 2 decimal places.) Show lessA Effect 8731 % Increase Margin

Explanation / Answer

Answer to Requirement No. 3

Cost saving of $13,000 by using less costly materials will reduce Average Operating Assets.

Expected Average Operating Assets = $507,000 - $13,000
Expected Average Operating Assets = $494,000

Margin = Net Operating Income / Sales * 100
Margin = 82,000 / 1,008,000 * 100
Margin = 8.13%

Turnover = Sales / Average Operating Assets
Turnover = 1,008,000 / 494,000
Turnover = 2.04

ROI = Margin * Turnover
ROI = 8.13 * 2.04
ROI = 16.59%

Answer to Requirement No. 4

Expected Average Operating Assets = $507,000 + $124,000
Expected Average Operating Assets = $631,000

Sales = $1,008,000

Expected Net Operating Income = $82,000 -$20,000 + $3,000
Expected Net Operating Income = $65,000

Margin = Net Operating Income / Sales * 100
Margin = 65,000 / 1,008,000 * 100
Margin = 6.45%

Turnover = Sales / Average Operating Assets
Turnover = 1,008,000 / 631,000
Turnover = 1.60

ROI = Margin * Turnover
ROI = 6.45 * 1.60
ROI = 10.32%

Answer to Requirement No. 5

Expected Sales = $1,008,000 * 1.15
Expected Sales = $1,159,200

Expected Net Operating Income = Expected Contribution Margin – Fixed Cost
Expected Contribution Margin = $403,200 * 1.15
Expected Contribution Margin = $463,680

Expected Net Operating Income = $463,680 - $321,200
Expected Net Operating Income = $142,480

Margin = Net Operating Income / Sales * 100
Margin = 142,480 / 1,159,200 * 100
Margin = 12.29%

Turnover = Sales / Average Operating Assets
Turnover = 1,159,200 / 507,000
Turnover = 2.29

ROI = Margin * Turnover
ROI = 12.29 * 2.29
ROI = 28.14%

Answer to Requirement No. 6

Written off of Inventory worth $19,000 will reduce Average Operating Assets.

Expected Average Operating Assets = $507,000 - $19,000
Expected Average Operating Assets = $488,000

Margin = Net Operating Income / Sales * 100
Margin = 82,000 / 1,008,000 * 100
Margin = 8.13%

Turnover = Sales / Average Operating Assets
Turnover = 1,008,000 / 488,000
Turnover = 2.07

ROI = Margin * Turnover
ROI = 8.13 * 2.07
ROI = 16.83%

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