Question

The Tracey Company had the following information for its most recent period:
	Total		Unit		%
Sales	$1,000,000		$50		100%
Variable expenses	600,000		30		60%
Contribution margin	400,000		$20		40%
Fixed expenses	320,000
Net operating income	$80,000
Average operating assets	$500,000
Compute the company's return on investment (ROI) for the period using the ROI
formula stated in terms of margin and turnover.
Net operating income	$80,000		Correct!
Sales	$1,000,000		Correct!
Average operating assets	$500,000		Correct!
Margin	8.00%		Correct!
Turnover	2.0		Correct!
ROI	16.00%		Correct!
Required:
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. Each case is separate so you should return to the original
data for your computations.
Note: Formulas must be used for Margin, Turnover, and ROI. The other cells should be
formulas but I will allow typed in numbers.
(a) The company achieves a cost savings of $10,000 per period by using less costly materials.
Net operating income	$90,000		Correct!			Type Increase, Decrease, or
Sales	$1,000,000		Correct!			Unchanged in the space below
Average operating assets	$500,000		Correct!
Margin	9.00%		Correct!			Increase	Correct!
Turnover	2.0		Correct!			Unchanged	Correct!
ROI	18.00%		Correct!			Increase	Correct!
(b) Using Lean Production, the company is able to reduce the average level of inventory by
$100,000. (The released funds are used to pay off bank loans.)
Net operating income	$80,000		Correct!			Type Increase, Decrease, or
Sales	$1,000,000		Correct!			Unchanged in the space below
Average operating assets	$400,000		Correct!
Margin	8.00%		Correct!			Unchanged	Correct!
Turnover	2.500		Correct!			Increase	Correct!
ROI	20.00%		Correct!			Increase	Correct!
(c) Sales are increased by $250,000; operating assets remained unchanged. (Remember,
if sales change, so will variable expenses.)
Sales	$1,250,000		Correct!
Variable expenses	750,000		Correct!
Contribution margin	500,000		Correct!
Fixed expenses	320,000		Correct!
Net operating income	$180,000		Correct!
Net operating income	$180,000		Correct!			Type Increase, Decrease, or
Sales	$1,250,000		Correct!			Unchanged in the space below
Average operating assets	$500,000		Correct!
Margin	14.40%		Correct!			Increase	Correct!
Turnover	2.500		Correct!			Increase	Correct!
ROI	36.00%		Correct!			Increase	Correct!
(d) The company issues bonds and uses the proceeds to purchase $125,000 in machinery
and equipment at the beginning of the period. Sales remain unchanged. The new, more
efficient equipment reduces production costs by $5,000 per period.
Net operating income	$180,000		Try Again!			Type Increase, Decrease, or
Sales	$1,200,000		Try Again!			Unchanged in the space below
Average operating assets	$495,000		Try Again!
Margin	?		Try Again!			Increase	Correct!
Turnover	?		Try Again!			Decrease	Correct!
ROI	?		Try Again!			Decrease	Correct!
(e) The company invests $180,000 of cash (received from accounts receivable) in a plot
of land that is to be held for possible future use as a plant site.
Net operating income	$0		Try Again!			Type Increase, Decrease, or
Sales			Try Again!			Unchanged in the space below
Average operating assets			Try Again!
Margin	?		Try Again!			unchanged	Correct!
Turnover	?		Try Again!			Increase	Correct!
ROI	?		Try Again!			increase	Correct!
(f) Obsolete inventory carried on the books at a cost of $20,000 is scrapped and written off
as a loss.
Net operating income			Try Again!			Type Increase, Decrease, or
Sales			Try Again!			Unchanged in the space below
Average operating assets			Try Again!
Margin	?		Try Again!			Decrease	Correct!
Turnover	?		2.083!			Increase	Correct!
ROI	?		Try Again!			Decrease	Correct!
I've answered some, I need help with the ones I was not able to answer (The ones that say "Try Again"). Please Show me the work don't just give me the answer

Answer 1

Solution

(a) The company achieves a cost savings of $10,000 per period by using less costly materials.

A

Net operating income

$90,000

(80000+10000)

Increased

Type Increase, Decrease, or

B

Sales

$1,000,000

Unchanged

Unchanged in the space below

C

Average operating assets

$500,000

Unchanged

D=A/B

Margin

9%

Increased

E=B/C

Turnover

2

Unchanged

F=A/C

ROI

18%

Increased

(b) Using Lean Production, the company is able to reduce the average level of inventory by

$100,000. (The released funds are used to pay off bank loans.)

A

Net operating income

$80,000

Unchanged

Type Increase, Decrease, or

B

Sales

$1,000,000

Unchanged

Unchanged in the space below

C

Average operating assets

$400,000

(500000-100000)

Decreased

D=A/B

Margin

8%

Unchanged

E=B/C

Turnover

2.5

Increased

F=A/C

ROI

20%

Increased

(c) Sales are increased by $250,000; operating assets remained unchanged. (Remember,

if sales change, so will variable expenses.)

Sales

$1,250,000

(1000000+250000)

Increased

Variable expenses

$750,000

600000*(1250000/1000000)

Increased

Contribution margin

$500,000

(1250000-750000)

Increased

Fixed expenses

$320,000

Unchanged

Net operating income

$180,000

(500000-320000)

A

Net operating income

$180,000

Increased

Type Increase, Decrease, or

B

Sales

$1,250,000

Increased

Unchanged in the space below

C

Average operating assets

$500,000

Unchanged

D=A/B

Margin

14.4%

Increased

E=B/C

Turnover

2.5

Increased

F=A/C

ROI

36%

Increased

d) The company issues bonds and uses the proceeds to purchase $125,000 in machinery

and equipment at the beginning of the period. Sales remain unchanged. The new, more

efficient equipment reduces production costs by $5,000 per period.

A

Net operating income

$85,000

(80000+5000)

Increased

Type Increase, Decrease, or

B

Sales

$1,000,000

Unchanged

Unchanged in the space below

C

Average operating assets

$625,000

(500000+125000)

Increased

D=A/B

Margin

8.5%

Increased

E=B/C

Turnover

1.6

Decreased

F=A/C

ROI

13.60%

Decreased