Problem 9-18B Return on Investment (ROI) Analysis [LO9-1]

The contribution format income statement for Strickland, Inc., for its most recent period is given below:

		Total		Unit
Sales		$	1,206,000	$	60.30
Variable expenses			723,600		36.18
Contribution margin			482,400		24.12
Fixed expenses			372,000		18.60
Net operating income			110,400		5.52
Income taxes @ 40%			44,160		2.21
Net income		$	66,240	$	3.31

The company had average operating assets of $593,000 during the period.

Required:

1.

Compute the companys return on investment (ROI) for the period using the ROI formula stated in terms of margin and turnover. (Round your intermediate calculations and final answer to 2 decimal places (i.e., 0.1234 should be entered as 12.34).)

ROI

%

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 ROI figure. Consider each question separately, starting in each case from the original ROI computed in (1) above.

2.

The company achieves a cost savings of $15,000 per period by using less costly materials. (Round your intermediate calculations and Turnover answer to 2 decimal places. Round your Margin and ROI percentage answers to 2 decimal places (i.e., 0.1234 should be entered as 12.34).)

			Effect
Margin		%
Turnover
ROI		%

3.

Using Lean Production, the company is able to reduce the average level of inventory by $109,000. (The released funds are used to pay off bank loans.) (Round your intermediate calculations and Turnover answer to 2 decimal places. Round your Margin and ROI percentage answers to 2 decimal places (i.e., 0.1234 should be entered as 12.34).)

			Effect
Margin		%
Turnover
ROI		%

4.	Sales are increased by $288,000; operating assets remain unchanged. (Round your intermediate calculations and Turnover answer to 2 decimal places. Round your Margin and ROI percentage answers to 2 decimal places (i.e., 0.1234 should be entered as 12.34).)

			Effect
Margin		%
Turnover
ROI		%

5.

The company issues bonds and uses the proceeds to purchase $200,000 in machinery and equipment at the beginning of the period. Interest on the bonds is $32,000 per period. Sales remain unchanged. The new, more efficient equipment reduces production costs by $10,400 per period. (Round your intermediate calculations and Turnover answer to 2 decimal places. Round your Margin and ROI percentage answers to 2 decimal places (i.e., 0.1234 should be entered as 12.34).)

			Effect
Margin		%
Turnover
ROI		%

6.

The company invests $218,000 of cash (received on accounts receivable) in a plot of land that is to be held for possible future use as a plant site. (Round your intermediate calculations and Turnover answer to 2 decimal places. Round your Margin and ROI percentage answers to 2 decimal places (i.e., 0.1234 should be entered as 12.34).)

			Effect
Margin		%
Turnover
ROI		%

7.

Obsolete inventory carried on the books at a cost of $26,000 is scrapped and written off as a loss. (Round your intermediate calculations and Turnover answer to 2 decimal places. Round your Margin and ROI percentage answers to 2 decimal places (i.e., 0.1234 should be entered as 12.34).)

			Effect
Margin		%
Turnover
ROI		%