Problem 5: More ROI Questions The contribution format income statement for Hawkins Company for last year is given below: PAGE 13 Sales Variable expenses Contribution margin Fixed expenses Net operating income Total $4,000,000 2.800,000 1,200,000 840.000 360,000 Unit $80.00 56.00 24.00 The company had average operating assets of $2,000,000 during the year. Required: 1. Compute the company's return on investment (ROI) for the period using the ROI formula state in terms of margin and turnover. Margin X = ROI Turnover $4,000,000 $360,000 $4,000,000 $2,000,000 9% 18% For each of the following questions, indicate whether the margin or 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 $400,000. (The released funds are used to pay off short-term creditors.) Margin - ROI Turnover $4,000,000 $360,000 $4,000,000 $1,600,000 9% 2.5 22.5% Unchanged Increased Increased PAGE 14 3. The company achieves a cost savings of $32,000 per year by using less costly materials. Margin Turnover = ROI 4. The company issues bonds and uses the proceeds to purchase $500,000 in machinery and equipment at the beginning of the period. Sales remain unchanged. The new, more efficient equipment reduces production costs by $20,000. Margin X Turnover ROI 5. As a result of a more intense effort by salespeople, sales are increased by 20%; operating assets remain unchanged. Margin Turnover ROI PAGE IS 6. Obsolete inventory carried on the books at a cost of $40,000 is scrapped and written off as a loss. Margin - x Turnover = ROI 7. The company uses $200,000 of cash (received on accounts receivable) to repurchase and retire some of its common stock. Margin Turnover ROI