Question

Use the following information to determine the changes in the following: cost of service failures (including invoice discount, rehandling cost, lost sales), net income, and Return on Assets.

Order fill increases from 92% to 98% with an average inventory increase of 25% and a 20

% increase in both warehousing and transportation costs.

Average price per order                                     $250

Gross margin per order                                      $87

Annual orders                                                   250,000

Of orders not filled correctly, 80% may be rectified with an invoice discount of $100 and additional handling per rectified order of $35

Cash                                                                 $5,000,000

Accounts receivable                                          $3,490,000

Fixed assets                                                      $120,000,000

Warehousing cost                                              $1,000,000

Other operating costs                                         $1,200,000

Tax rate                                                            20% of (EBIT-interest)

Transportation cost                                           $800,000

Average inventory                                            $2,000,000

Interest cost                                                      $400,000

Inventory carrying cost                                      10% per year

ABC Company is considering a move to outsource is warehousing operations. Current financial information is shown below.

Sales                                                               $500,000

Transportation cost                                          $15,000

Warehousing cost                                            $10,000

Inventory carrying cost                                    18%

Cost of goods sold                                           $325,000

Other operating costs                                       $95,000

Average inventory                                           $50,000

Accounts receivable                                         $30,000

Cash                                                               $15,000

Net fixed assets                                               $850,000

Interest                                                           $10,000

Taxes                                                              20% of (EBIT – Interest)

As a result of outsourcing warehousing the following changes will occur.

Net fixed assets reduced                                   15%

Inventory reduced                                            15%

Warehousing costs                                           $0

Outsourcing provider costs                               $20,000

            Determine the effect on ROA if warehousing is outsourced.

Answer 1

First of all we should find Net Income-

Particulars	If Warhouse not Outsourced	If Warhouse Outsourced
Sales	$500000	$500000
Less- Transportation Cost	$15000	$15000
Less- Warehouse Cost	$10000	$0
Less- inventery Carry cost	$9000	$9650
Less- Cost of Good Sold	$325000	$325000
Less- Other Operating Cost	$95000	$95000
Less- Outsource cost	$0	$20000
EBIT	$46000	$37350
Less-Interest	$ 10000	$ 10000
Profit Before Tax	$36000	$27350
Less- Tax	$ 7200	$5470
Net Income	$28800	$21880

Now we should Calculate Total Asessts-

Particulars	If Warhouse not Outsourced	If Warhouse Outsourced
Net Fixed Assets	$850000	$722500
Account Recevable	$30000	$30000
Inventory	$50000	$42500
Cash	$15000	$15000
Total Assets	$945000	$810000

RETURN ON ASSETS

Particulatrs	If Warhouse NOT Outsourced	If Warhouse Outsourced
(A) Net Income	$28800	$21880
(B) Total Assets	$945000	$810000
ROA{A/B*100}	3.04%	2.70%