Module 5 Case 4 The contribution format Income statement for Huerca Company for last year is given below: Total Unit Sales $4,000,000 $80.00 Variable expenses 2,800,000 56.00 Contribution margin 1,200,000 24.00 Fixed expenses 840,000 16.60 Net operating Income 360,000 7.20 Income taxes 30% 108,000 2.16 Net operating income $ 252,000 $ 5.04 The company had average operating assets of $2,000,000 during the year. Required: 1. The company reduces fixed expenses by 10% by cutting advertising. This results in a 10% reduction in sales. Assets remain unchanged. 2. After spending $50,000 on training of salespeople, sales are increased by 20%; operating assets remain unchanged. 3. Obsolete Inventory carried on the books at a cost of $60,000 is scrapped and written off as a loss. 4. The company borrows $200,000 from the bank and Invests in more efficient equipment; as a result, overall sales do not change, but variable expenses decrease by 10%. ANSWER 1. Margin= Turnover ROI 2. For 2 through 7. just state if Margin will increase (1), Decrease (D), or remain the same (NA), Turnover will I, D, or NA. HINT: carry to the nearest 2 decimals of a %; may need to plug in numbers if both numerator and denominator move in the same direction (ie numerator or denominator both increase or both decrease). Margin= Turnover = Margin- 3. Turnover = Margin= 4. Turnover