Question

The contribution format income statement for Huerra Company for last year is given below:

	Total		Unit
Sales	$	996,000	$	49.80
Variable expenses		597,600		29.88
Contribution margin		398,400		19.92
Fixed expenses		316,400		15.82
Net operating income		82,000		4.10
Income taxes @ 40%		32,800		1.64
Net income	$	49,200	$	2.46

The company had average operating assets of $502,000 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 $93,000. (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 $122,000. Interest on the bonds is $11,000 per year. Sales remain unchanged. The new, more efficient equipment reduces production costs by $4,000 per year.

5. As a result of a more intense effort by salespeople, sales are increased by 10%; operating assets remain unchanged.

6. At the beginning of the year, obsolete inventory carried on the books at a cost of $17,000 is scrapped and written off as a loss.

7. At the beginning of the year, the company uses $184,000 of cash (received on accounts receivable) to repurchase and retire some of its common stock.

I did all this work and do not know why some of my answers are wrong.

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 answers to 2 decimal places.)

part 1
	Margin 4.94selected answer incorrect % Turnover 1.98selected answer correct ROI 9.78selected answer incorrect %

part 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.) (Round your intermediate calculations and final answers to 2 decimal places.)

	Effect Margin 8.23selected answer correct % Unchangedselected answer correct Turnover 2.44selected answer correct Increaseselected answer correct ROI 20.01selected answer correct % Increaseselected answer correct

part 3

The company achieves a cost savings of $6,000 per year by using less costly materials. (Round your intermediate calculations and final answers to 2 decimal places.)

	Effect Margin 8.83selected answer correct % Increaseselected answer correct Turnover 1.98selected answer correct Unchangedselected answer correct ROI 17.48selected answer correct % Increaseselected answer correct

part 4

The company issues bonds and uses the proceeds to purchase machinery and equipment that increases average operating assets by $122,000. Interest on the bonds is $11,000 per year. Sales remain unchanged. The new, more efficient equipment reduces production costs by $4,000 per year. (Do not round intermediate calculations and round your final answers to 2 decimal places.)

Show less

	Effect Margin 8.94selected answer incorrect % Increaseselected answer correct Turnover 1.58selected answer incorrect Decreaseselected answer correct ROI 14.15selected answer incorrect % Decreaseselected answer correct

part 5

As a result of a more intense effort by salespeople, sales are increased by 10%; operating assets remain unchanged. (Round your intermediate calculations and final answers to 2 decimal places.)

	Effect Margin 12.38selected answer incorrect % Increaseselected answer correct Turnover 2.28selected answer incorrect Increaseselected answer correct ROI 28.30selected answer incorrect % Increaseselected answer correct

part 6

At the beginning of the year, obsolete inventory carried on the books at a cost of $17,000 is scrapped and written off as a loss. (Round your intermediate calculations and final answers to 2 decimal places.)

	Effect Margin 6.43selected answer incorrect % Decreaseselected answer correct Turnover 2.06selected answer correct Increaseselected answer correct ROI 13.25selected answer correct % Decreaseselected answer correct

part 7

At the beginning of the year, the company uses $184,000 of cash (received on accounts receivable) to repurchase and retire some of its common stock. (Round your intermediate calculations and final answers to 2 decimal places.)

	Effect Margin 8.23selected answer correct % Unchangedselected answer correct Turnover 3.13selected answer correct Increaseselected answer correct ROI 25.79selected answer correct % Increaseselected answer correct

Answer 1

1)
Sales	996000
Net operating income	82000
Average Operating assets	502000
Margin % = NOI/Sales	8.23%
Asset Turnover = sales/operating assets	1.98
ROI = Margin% x Asset Turnover	16.33%
2)
Sales	996000
Net operating income	82000
Average Operating assets ($502000 - $93,000)	409000
Margin % = NOI/Sales	8.23%	Unchanged
Asset Turnover = sales/operating assets	2.44	Increase
ROI = Margin% x Asset Turnover	20.05%	Increase
3)
Sales	996000
Net operating income($82000+6000)	88000
Average Operating assets	502000
Margin % = NOI/Sales	8.84%	Increase
Asset Turnover = sales/operating assets	1.98	Unchanged
ROI = Margin% x Asset Turnover	17.53%	Increase
4)
Interest is a financing expense and thus it is not used to compute net operating income.
Sales	996000
Net operating income($82,000+4000)	86000
Average Operating assets ($502000+ $122,000)	624000
Margin % = NOI/Sales	8.63%	increase
Asset Turnover = sales/operating assets	1.60	Decrease
ROI = Margin% x Asset Turnover	13.78%	decrease
5)
Sales = sales x 1.10	1095600	100.00%
Variable expenses = VE x 1.10	657360	60.00%
Contribution margin	438240	40.00%
Fixed expenses	316400
Net operating income	121840
Average Operating assets	502000
Margin % = NOI/Sales	11.12%	increase
Asset Turnover = sales/operating assets	2.18	increase
ROI = Margin% x Asset Turnover	24.27%	increase
6)
Sales	996000
Net operating income (82000-17000)	65000
Average Operating assets (502000 -17000)	485000
Margin % = NOI/Sales	6.53%	Decrease
Asset Turnover = sales/operating assets	2.05	Increase
ROI = Margin% x Asset Turnover	13.40%	Decrease
7)
Sales	996000
Net operating income	82000
Average Operating assets ($502000- 184000)	318000
Margin % = NOI/Sales	8.23%	Unchanged
Asset Turnover = sales/operating assets	3.13	Increase
ROI = Margin% x Asset Turnover	25.79%	Increase