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 Unit Sales Variable expenses Contribution margin Fixed expenses Net operating income Income taxes @ 40% Net income $. 1,000,000 50.00 30.00 20.00 16.10 3.90 1.56 $ 46,800 $ 2.34 600,000 400,000 322,000 78,000 31,200 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 ROl 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 ROl 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 $99,000. (The released funds are used to pay off short-term creditors.) 3. The company achieves a cost savings of $6,000 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 $14,000 per year. Sales remain unchanged The new, more efficient equipment reduces production costs by $8,000 per year 5. 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 $16,000 is scrapped and written off as a loss 7. At the beginning of the year, the company uses $179,000 of cash (received on accounts receivable) to repurchase and retire some of its common stock

Explanation / Answer

Req 1: PRESENT Sales Revenue 1,000,000 Net operating income after tax 46,800 Operating Assets 494,000 Margin%(Net Operating Income/Sales*100) 4.68% Turnover(Sales/ Operating assets) 2.02 ROI(margin%*Turnover) 9.45% Req 2: Average level of inventory reduced by $99,000 Operating assets revised to (494,000-99,000) $ 395,000 Therefore, REVISED Sales Revenue 1,000,000 Net operating income after tax 46,800 Operating Assets 395,000 Margin%(Net Operating Income/Sales*100) 4.68% Turnover(Sales/ Operating assets) 2.53 ROI(margin%*Turnover) 11.84% Req 3: Direct material decrease by $ 6,000 Contribution and net operating income before tax increase by $ 6,000 Net Operating income increase by (6000-tax rate i.e. 40%)   $ 3,600 Revised Operating income after tax (60840+7500) $ 68,340 Therefore, REVISED Sales Revenue 1,000,000 Net operating income after tax 50,400 Operating Assets 494,000 Margin%(Net Operating Income/Sales*100) 5.04% Turnover(Sales/ Operating assets) 2.02 ROI(margin%*Turnover) 10.18% Req 4: Average operating assets increase by $129,000 Revised Average operating assets (494,000+129,000) = $623,000 Net Operating income before tax Decrease by $6,000 (i.e. interets less saving in material cost) Net operating income after tax decrease by (6000-40%) = $3600 Revised net operating income after tax (46800-3600) = $43,200 Therefore, REVISED Sales Revenue 1,000,000 Net operating income after tax 43,200 Operating Assets 623,000 Margin%(Net Operating Income/Sales*100) 4.32% Turnover(Sales/ Operating assets) 1.61 ROI(margin%*Turnover) 6.95%

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