Check my work 8 The contribution format income statement for Huerra Company for
ID: 2576457 • Letter: C
Question
Check my work 8 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 $ 994,000 $49.70 29.82 19.88 15.68 4.20 1.68 $ 50,400 2.52 12.5 points 596,400 397,600 313,600 84,000 33,600 eBook Print References The company had average operating assets of $497,000 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 wil 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 $102,000. (The released funds are used to pay off short-term creditors.) 3. The company achieves a cost savings of $8,000 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 $125,000. Interest on the bonds is $18,000 per year. Sales remain unchanged. The new, more efficient equipment reduces production costs by $5,000 per year 5. Sales are increased by 20%; operating assets remain unchanged. 6. At the beginning of the year, obsolete inventory carried on the books at a cost of $20,000 is scrapped and written off as a loss. 7. At the beginning of the year, the company uses $182,000 of cash (received on accounts receivable) to repurchase and retire some of its common stock. Complete this question by entering your answers in the tabs below McExplanation / Answer
2. Due to reduction in average level of inventory, Average operating assets will be reduced by $102000.
Average operating assets now will be = $497000 - $102000 = $395000
Margin will remain unchanged: Margin = 8.45%
Turnover will increase. Turnover = Sales/ Average operating assets
= $994000/ $395000 = 2.52 times
ROI will also increase. ROI = Net operating income/ Average operating assets
= $84000/ $395000 = 21.27%
4. Net operating income = Original amount - Interest on bonds + Reduction in production costs
= $84000 - 18000 + 5000 = $71000
Average operating assets = $497000 + $125000 = $622000
Margin = Net operating income/ Sales
= $71000/ $994000 = 7.14%
Turnover = Sales/ Average operating assets
= $994000/ $622000
= 1.60 times
ROI = Net operating income/ Average operating assets
= $71000/ $622000
= 11.41%
5. Sales = $994000 x 1.20 = $1192800
Variable expenses will also increase by 20%
Contribution margin = 397600 x 1.20 = $477120
Net operating income = Contribution margin - Fixed expenses
= $477120 - $313600
= $163520
Margin = Net operating income/ Sales
= $163520/ $1192800 = 13.71%
Turnover = Sales/ Average operating assets
= $1192800/ $497000
= 2.40 times
ROI = Net operating income/ Average operating assets
= $163520/ $497000
= 32.90%
6. Average operating assets will be reduced by $10000. Average operating assets = $497000 - 10000 = $487000
Net operating income will get reduced by $10000. Net operating income = $84000 - 10000 = $74000
Margin = Net operating income/ Sales
= $74000/ $994000
= 7.44%
Turnover = Sales/ Average operating assets
= $994000/ $487000 = 2.04 times
ROI = Net operating income/ Average operating assets
= $74000/ $487000 = 15.20%
7. Average operating assets will get reduced by $182000. Average operating assets = $497000 - $182000 = $315000
Margin will remain same. Margin = 8.45%
Turnover = Sales/ Average operating assets
= $994000/ $315000
= 3.16 times
ROI = Net operating income/ Average operating assets
= $84000/ $315000
= 26.67%
Effect Margin 7.14% Decrease Turnover 1.60 times Decrease ROI 11.41% Decrease