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:

The company had average operating assets of $494,000 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 ROI in (1) above.

2. Using Lean Production, the company is able to reduce the average level of inventory by $106,000. (The released funds are used to pay off short-term creditors.)

3. The company achieves a cost savings of $9,000 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 $129,000. Interest on the bonds is $12,000 per year. Sales remain unchanged. The new, more efficient equipment reduces production costs by $5,000 per year.

5. As a result of a more intense effort by sales people, sales are increased by 25%; operating assets remain unchanged.

6. At the beginning of the year, obsolete inventory carried on the books at a cost of $15,000 is scrapped and written off as a loss.

7. At the beginning of the year, the company uses $183,000 of cash (received on accounts receivable) to repurchase and retire some of its common stock.

Total Unit Sales $ 1,008,000 $ 50.40 Variable expenses 604,800 30.24 Contribution margin 403,200 20.16 Fixed expenses 319,200 15.96 Net operating income 84,000 4.20 Income taxes @ 40% 33,600 1.68 Net income $ 50,400 $ 2.52 The Contribution Format lnco E Connect e https://newconnect.mheducation.com/flow/connect.html?isReg-true&returnUrl;=https%3A%2F%2 Fo 110% … Chapter 11 Homework Help Save & Ext Submlt Saved 2 Check my work 3 Complete this question by entering your answers in the tabs below Required 1Required 2 Required 3 Required 4 Required 5Required 6Required 7 33.34 points Compute the company's return on investment (ROI) for the period using the ROI formula stated in terms of margin and turnover. (Round your intermediate calculations and final answer to 2 decimal places.) Print Margin 5.00 2.04 2.45 ROI Mc Graw

Explanation / Answer

Required 1 Margin = Net Income / Net Sales = 50,400 / 1,008,000 5.00% Turnover = Net sales / Operating Assets = 1,008,000 / 494,000 2.04 ROI = Margin x Turnover = 5.00% x 2.04 10.20% Required 2 Margin = Net Income / Net Sales = 50,400 / 1,008,000 5.00% Unchanged Turnover = Net sales / Operating Assets = 1,008,000 / 388,000 2.60 Increase ROI = Margin x Turnover = 5.00% x 2.60 12.99% Increase Required 3 Margin = Net Income / Net Sales = 55,800 / 1,008,000 5.54% Increase Turnover = Net sales / Operating Assets = 1,008,000 / 494,000 2.04 Unchanged ROI = Margin x Turnover = 5.54% x 2.04 11.30% Increase Sales 1008000 Variable expense (less 9,000) 595800 Contribution Margin 412200 Fixed expenses 319200 Net Operating Income 93000 Income taxes - 40% 37200 Net Income 55800 Required 4 Margin = Net Income / Net Sales = 46,200 / 1,008,000 4.58% Decrease Turnover = Net sales / Operating Assets = 1,008,000 / 623,000 1.62 Decrease ROI = Margin x Turnover = 4.58% x 1.62 7.42% Decrease Sales 1008000 Variable expense (less 5,000) 599800 Contribution Margin 408200 Fixed expenses 331200 Net Operating Income 77000 Income taxes - 40% 30800 Net Income 46200

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