Question 2 (Correspondence to Chapter of Performance Measurement in Decentralised Operation) The contribution format income statement for Huerra Company for last year is given below: Total Unit $80.00 56.00 Sales Variable expenses Contribution margin Fixed expenses Net operating income Income taxes @ 30% Net operating income $4,000,000 2,800,000 1,200,000 840,000 360,000 108,000 $ 252,000 24.00 16.80 7.20 2.16 $ 5.04 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 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 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.) 3. The company achieves a cost savings of $32,000 per year by using less costly materials. 4. The company issues bonds and uses the proceeds to purchase $500,000 in machinery and equipment at the beginning of the period. Interest on the bonds is $60,000 per year. Sales remain unchanged. The new, more efficient equipment reduces production costs by $20,000 per year. 5. As a result of a more intense effort by salespeople, sales are increased by 20%; operating assets remain unchanged. 6. Obsolete inventory carried on the books at a cost of $40,000 is scrapped and written off as a loss. 7. The company uses $200,000 of cash (received on accounts receivable) to repurchase and retire some of its common stock. Question 3 (Correspondence to Chapter of Incremental Analysis/Differential Analysis) Home Nursing Meals On Wheels House- keeping Total $900,000 490,000 $260,000 120,000 140,000 $400,000 $240,000 210,000 160,000 410,000 190,000 80,000 Revenues Variable expenses Contribution margin Fixed expenses: Depreciation Liability insurance Program administrators' salaries General administrative overhead* 68,000 42,000 115,000 180,000 405,000 $ 5,000 8,000 20,000 40,000 52,000 120,000 $ 20,000 40,000 7,000 38,000 80,000 165,000 $ 25,000 20,000 15,000 37,000 48,000 Total fixed expenses 120,000 $ (40,000) Net operating income (loss) *Allocated on the basis of program revenues. The head administrator of Jackson County Senior Services, Judith Miyama, is concerned about the organization's finances and considers the net operating income of $5,000 last year to be razor-thin. (Last year's results were very similar to the results for previous years and are represen- tative of what would be expected in the future.) She feels that the organization should be building its financial reserves at a more rapid rate in order to prepare for the next inevitable recession. After seeing the above report, Ms. Miyama asked for more information about the financial advisability of perhaps discontinuing the housekeeping program. The depreciation in housekeeping is for a small van that is used to carry the housekeepers and their equipment from job to job. If the program were discontinued, the van would be donated to a charitable organization. None of the general administrative overhead would be avoided if the housekeeping program were dropped, but the liability insurance and the salary of the program administrator would be avoided. Required: 1. Should the Housekeeping program be discontinued? Explain. Show computations to support your answer. 2. Recast the above data in a format that would be more useful to management in assessing the long-run financial viability of the various services