Question

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

	Total		Unit
Sales	$	994,000	$	49.70
Variable expenses		596,400		29.82
Contribution margin		397,600		19.88
Fixed expenses		315,600		15.78
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 $496,000 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. (Round your intermediate calculations and final answer to 2 decimal places.)

	Effect Margin % Turnover ROI %

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.) (Round your answers to 2 decimal places.)

	Effect Margin % Turnover ROI %

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

	Effect Margin % Turnover ROI %

4. The company issues bonds and uses the proceeds to purchase $129,000 in machinery and equipment at the beginning of the period. Interest on the bonds is $14,000 per year. Sales remain unchanged. The new, more efficient equipment reduces production costs by $6,000 per year. (Round your answers to 2 decimal places.)

	Effect Margin % Turnover ROI %

5. Sales are increased by 25%; operating assets remain unchanged. (Round your answers to 2 decimal places.)

	Effect Margin % Turnover ROI %

6. Obsolete inventory carried on the books at a cost of $16,000 is scrapped and written off as a loss. (Round your answers to 2 decimal places.)

	Effect Margin % Turnover ROI %

7. The company uses $185,000 of cash (received on accounts receivable) to repurchase and retire some of its common stock. (Round your answers to 2 decimal places.)

	Effect Margin % Turnover ROI %

Answer 1

$
	Case-1	Case-2	Case-3	Case-4	Case-5	Case-6	Case-7
Turnover	994000	888000	994000	994000	1242500	978000	994000
Variable Expenses	596400	596400	590400	590400	596400	596400	596400
Contribution/margin	397600	291600	403600	403600	646100	381600	397600
Fixed expenses	315600	315600	315600	328500	315600	315600	315600
EBIT	82000	-24000	88000	75100	330500	66000	82000
Interest	0	0	0	14000	0	0	0
EBT	82000	-24000	88000	61100	330500	66000	82000
Income Tax @40%	32800	-9600	35200	24440	132200	26400	32800
EAT	49200	-14400	52800	36660	198300	39600	49200
ROI(EAT/Turnover)	5%	-2%	5%	4%	16%	4%	5%