Total Unit Sales Variable expenses Contribution margin Fixed expenses Net operat
ID: 2601166 • Letter: T
Question
Total Unit Sales Variable expenses Contribution margin Fixed expenses Net operating income Income taxes 40S Net income 1,004,000 602,400 401,600 323,600 78,000 31,200 46,800 50.20 30.12 20.08 16.18 3.90 1.56 2.34 The company had average operating assets of $508,000 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 ROl 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 $92,000. (The released funds are used to pay off short-term creditors.) 3. The company achieves a cost savings of $14,000 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 $130,000. Interest on the bonds is $20,000 per year. Sales remain unchanged. The new, more efficient equipment reduces production costs by $8,000 per year. 5. As a result of a more intense effort by sales people, 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 $17,000 is scrapped and written off as a loss 7. At the beginning of the year, the company uses $176,000 of cash (received on accounts receivable) to repurchase and retire some of its common stockExplanation / Answer
Answer:
Return on Investment = Margin * Turnover
Margin = Net Operating Income/ Sales * 100
Turnover = Sales / Average Operating Assets
Answer to Part 1.
Margin = 78,000 / 1,004,000 * 100
Margin = 7.77%
Turnover = 1,004,000 / 508,000
Turnover = 1.98
Return on Investment = 7.77 * 1.98
Return on Investment = 15.38%
Answer to Part 2.
Reduction in Average Inventory will reduce Average Operating Assets.
Expected Average Operating Assets = $508,000 - $92,000 = $416,000
Margin = 78,000 / 1,004,000 * 100
Margin = 7.77% (Unchanged)
Turnover = 1,004,000 / 416,000
Turnover = 2.41 (Increase)
Return on Investment = 7.77 * 2.41
Return on Investment = 18.73% (Increase)
Answer to Part 3.
Cost Saving of $14,000 will increase the Net Operating Income by $14,000.
Expected Net Operating Income = $78,000 + $14,000 = $92,000
Margin = 92,000 / 1,004,000 * 100
Margin = 9.16% (Increase)
Turnover = 1,004,000 / 508,000
Turnover = 1.98 (Unchanged)
Return on Investment = 9.16 * 1.98
Return on Investment = 18.14% (Increase)
Answer to Part 4.
Purchase of Machinery and Equipment will increase Average Operating Assets by $130,000. Interest Expense will reduce Net Operating Income but production Cost will Increase Net Operating Income by $8,000.
Expected Average Operating Assets = $508,000 + $130,000 = $638,000
Net Operating Income = $78,000 - $20,000 + $8,000 = $66,000
Margin = 66,000 / 1,004,000 * 100
Margin = 6.57% (Decrease)
Turnover = 1,004,000 / 638,000
Turnover = 1.57 (Decrease)
Return on Investment = 6.57 * 1.57
Return on Investment = 10.34% (Decrease)