Digital Company has net operating income of \(\$ 500,000\) and operating assets of \(\$ 2,000,000\). Its net sales are \(\$ 4,000,000\).

The accountant for the company computes the rate of return on operating assets after computing the operating margin and the turnover of operating assets.

a. Show the computations the accountant made.

b. Indicate whether the operating margin and turnover increase or decrease after each of the following changes. Then determine what the actual rate of return on operating assets would be. The events are not interrelated; consider each separately, starting from the original earning power position. No other changes occurred.

(1) Sales increased by \(\$ 160,000\). There was no change in the amount of operating income and no change in operating assets.
(2) Management found some cost savings in the manufacturing process. The amount of reduction in operating expenses was \(\$ 40,000\). The savings resulted from the use of less materials to manufacture the same quantity of goods. As a result, average inventory was \(\$ 16,000\) lower than it otherwise would have been. Operating income was not affected by the reduction in inventory.
(3) The company invested \(\$ 80,000\) of cash (received on accounts receivable) in a plot of land it plans to use in the future (a nonoperating asset); income was not affected.
(4) The federal income tax rate increased and caused income tax expense to increase by \(\$ 20,000\). The taxes have not yet been paid.
(5) The company issued bonds and used the proceeds to buy \(\$ 400,000\) of machinery to be used in the business. Interest payments are \(\$ 20,000\) per year. Net operating income increased by \(\$ 100,000\) (net sales did not change).